Deutsche Bank Markets Research
Industry Date 4 February 2015 Beer Sub-Saharan Africa
Consumer Staples Beverage
Wynand Van Zyl Research Analyst (+27) 11 775-7185 [email protected]
Tristan Van Strien Research Analyst (+44) 20 754-77654 [email protected]
Gerry Gallagher Research Analyst (+44) 20 754-50251 [email protected]
F.I.T.T. for investors
The rising star of Africa
Driving the next decade of beer growth
Over the next decade, Africa should account for 40% of global volume and profit growth. In our view, population dynamics will drive structural growth; realistic pricing will accelerate per capita growth, taking share from illicit alcohol in a continent where only 15% can currently afford a beer. Structurally protective "moats" and strong positions for established players help ensure sustainable profits. Any corporate activity would likely be limited to the last independent brewer, Castel, and consolidation in ancillary businesses including soft drinks. Heineken (Buy) and SABMiller (Hold) appear best positioned to capture the growth.
______Deutsche Securities (Pty) Ltd Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.
Deutsche Bank Markets Research
Sub-Saharan Africa Industry Date 4 February 2015 Consumer Staples Beer Beverage FITT Research
Wynand Van Zyl Research Analyst The rising star of Africa (+27) 11 775-7185 [email protected]
Driving the next decade of beer growth Tristan Van Strien Over the next decade, Africa should account for 40% of global volume and Research Analyst profit growth. In our view, population dynamics will drive structural growth; (+44) 20 754-77654 realistic pricing will accelerate per capita growth, taking share from illicit [email protected] alcohol in a continent where only 15% can currently afford a beer. Structurally protective "moats" and strong positions for established players help ensure Gerry Gallagher sustainable profits. Any corporate activity would likely be limited to the last independent brewer, Castel, and consolidation in ancillary businesses including Research Analyst soft drinks. Heineken (Buy) and SABMiller (Hold) appear best positioned to (+44) 20 754-50251 capture the growth. [email protected]
Africa to lead the growth in beer Companies Featured The next decade will see disproportionate growth in beer driven by Africa, with volume rising 8% per annum, on our estimates. Unlike the previous decade Heineken (HEIN.AS),EUR66.15 Buy where most of the volume growth was driven by China, the gains in Africa 2013A 2014E 2015E should mean profitable growth as high revenues and margins look to be DB EPS (EUR) 2.75 3.06 3.29 sustainable by established players with high barriers to entry. We expect the P/E (x) 19.2 21.6 20.1 profit pool in Africa to expand US$5billion in EBIT by 2025. EV/EBITA (x) 14.5 16.0 14.8
Favorable population dynamics, especially with the key beer-drinking 20-35 Diageo (DGE.L),GBP1,926.00 Buy year-old cohort expanding almost 3% per year, should drive half the growth. 2014A 2015E 2016E Realistic pricing at or below inflation should raise per capita consumption, DB EPS (GBP) 100.07 91.80 100.14 taking share from illicit alcohol, which accounts for 80% of all alcohol on the P/E (x) 19.3 21.0 19.2 continent. Growth will not be smooth; it never is in Africa. However, the EV/EBITA (x) 17.6 18.4 16.0 swings in commodities such as oil in Nigeria have a nuanced impact on the robustness of beer growth. SABMiller (SABJ.J),ZAR620.78 Hold 2014A 2015E 2016E Castel, Coke, Guinness DB EPS (USD) 2.39 2.43 2.56 Family-owned Castel, accounting for $2bn of EBITDA in Africa, is often seen as P/E (x) 20.8 22.2 21.0 a potential target for future M&A on the continent – but a deal would be more EV/EBITA (x) 15.4 16.1 15.5 complicated for a company with no need to sell. More activity is likely in Source: Deutsche Bank ancillary beverages to leverage the brewing platforms of established players. Further consolidation of the Coca Cola bottlers, led by SABMiller, should lead Share of EBIT from Africa activity in the short term. Despite its advantaged position, if Diageo’s underperformance in beer continues, we see the company possibly exiting the 40% operational elements in Africa, but not beer per se. 35% 31% Heineken and SABMiller best positioned 30% 27% Twenty companies have significant exposure to beer in Africa, 17 of which are 21% listed in frontier markets or have low liquidity. Of the major players, Heineken 20% 2015e has the best exposure, potentially grabbing a third of the growth in Africa over 2019e the next decade. This, coupled with the best growth profile in beer and strong 10% brand-building capabilities on a reduced cost base, leads us to reiterate our Buy. SABMiller could capture over a quarter of the growth and has proven, 0% SABMiller Heineken superior management capability to realize its potential. However, headwinds in core markets, and the costs – financial and managerial – associated with centralization programs offset its prospects; we maintain our Hold. Source: Deutsche Bank estimates, Company reports
Valuations and risks We value our companies using DCF models. We separately outline the assumptions and risks for each company DCF analysis in this report.
______Deutsche Securities (Pty) Ltd Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.
4 February 2015
Beverage Beer
Table Of Contents
Executive summary ...... 3 Key points and charts ...... 3 Africa Beer ...... 7 The global beer growth engine ...... 7 HEIN and SAB best positioned to capture growth ...... 12 Realistic pricing unlocks and protects growth ...... 16 Population and GDP drive structural growth ...... 20 Beer’s impressive ability to manage the headwinds ...... 23 African M&A ...... 25 The investable universe in Africa ...... 30 Heineken ...... 34 An African Star ...... 34 The strongest growth platform in beer ...... 40 Valuation and key graphs ...... 43 SABMiller ...... 48 An African Eagle ...... 48 The other 2/3rds clipping the wings ...... 56 The unnecessary put option ...... 59 Valuation and key charts ...... 61 Africa leading the growth ...... 64 The global beer growth engine ...... 64 Key markets for growth ...... 68 Population drives staples growth, and African beer ...... 75 Plenty of room in per caps ...... 78 Affordability remains key ...... 82 Impact of GDP growth on per capita growth ...... 87 Taking share from the bottom of the pyramid ...... 90 The evolving brewing landscape ...... 94 Diageo - beer's secondary role to spirits...... 99 Castel - acting like owners, because they are ...... 110 The KO opportunity ...... 115 Beer & Coke works ...... 115 The KO African landscape ...... 117 The Coca Cola Beverages Africa deal ...... 120 The other big bottlers in Africa ...... 128 The usual headwinds ...... 131 The (little) impact of negative commodity cycle ...... 131 Drivers supporting Africa’s growth momentum ...... 135 Risks to growth...... 138 African exposure ...... 141 The investable universe in Africa ...... 141 SABMiller listed entities ...... 144 Diageo listed subsidiaries ...... 158 Heineken listed subsidiaries ...... 164 Castel listed subsidiaries...... 172 Independent African listed brewers ...... 178 Addendum ...... 184 Getting a Harvard MBA in Africa ...... 184
Page 2 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Executive summary
Key points and charts
Africa to lead the global volume and profit growth of beer Africa should drive profitable growth over the next decade, accounting for 37% of global beer volume and 42% of profit growth;
Unlike China in the last 20 years, Africa’s volume growth is profitable. Protected dominant positions sustain high revenues and margins;
We expect the US$36bn global beer profit pool to expand US$11.5bn in constant currency terms by 2025; Africa accounts for US$5bn of this.
Figure 1: Africa to lead volume growth… Figure 2: …and profitable growth (est to 2025)
100% 160 $6.0
5% Newprofit 2015 12% 140 134 Volume mhl (left axis) 37% $4.9 $5.0 80% EBIT US$bn (right axis) Africa 120 101 Latin America $4.0
60% 100 -
$3.3 2025(2015 US$ billions) 2025 2025 (mhl) Asia ex-China - 81 28% 80 $3.0 40% China $2.5 60 Eastern Europe $2.0 22% 20% 40 Western Europe 2015 volume New $1.0 $1.0 14 North America 20 12 11 9 $0.3 0% 1995-2005 2005-2015 2015-2025DBe 0 $0.0 Africa Latin Asia ex- China Eastern Western North -20% America China Europe Europe America
Source: Deutsche Bank estimates, Plato Logic, World Bank Source: Deutsche Bank estimates, company reports, Plato Logic
Heineken and SABMiller best positioned Heineken and SABMiller have the strongest direct positions in Africa, with a quarter of their profits derived from the continent. SABMiller further benefits from its minority stake in Castel;
Relative to their current size, the expansion of the profit pool is most relevant to Heineken. We estimate Africa will add over 35% to current group profitability.
Figure 3: Africa divisions share 2015DBe Figure 4: Africa growth most relevant to Heineken
30% 40% 25% 25% EBITA 35% 22%
Revenue EBIT 20% 30%
25% 2025 2025
15% EBIT e goup
11% 20%
10% 2015 15% 4% 5% 10%
Africa forecatedAfrica 5% 0% to relative SABMiller (Africa Heineken (Africa Diageo (Africa Eastern Diageo Africa Beer subsidairies only) Middle East Europe Middle East) only 0% consolidated) Heineken SABMiller Diageo
Source: Deutsche Bank estimates, company reports based on 2015DBe full year. Source: Deutsche Bank estimates, company reports
Deutsche Securities (Pty) Ltd Page 3
4 February 2015
Beverage Beer
Africa to grow 8% volume per annum We forecast the market in Africa to grow volumes at 8% per annum to 2025, slightly higher than the 6% seen in the previous decade to 2015;
Heineken should grow volume 9% per annum with its positions in Nigeria, Ethiopia and DR Congo capturing a third of the growth;
SABMiller should grow volume 6% per annum, 12% ex-South Africa dominating South and East Africa helped by the recent entry in Nigeria;
Privately owned Castel is strong in Francophone Africa and Angola where we expect volume growth to moderate to 6% per annum of a higher base;
On paper, Diageo has great potential to grow 11% per annum in beer. Historically the company has failed to deliver and we see a possible exit from operating in beer (though we believe it would likely keep the Guinness brand).
Figure 5: Africa beer volumes should grow 8% p.a…. Figure 6: …with Heineken and SAB capturing the majority 300 Delta ZimOther 2% 1% 259m hl Diageo 250 16% Heineken 8% CAGR Diageo 31% 200 Castel
150
Million Hl Million 124m hl Diageo SABMiller 100 Castel Castel 23%
50 SABMiller Heineken Heineken SABMiller (subs 0 only) 2015DBe 2025DBe 27%
Heineken SABMiller Castel Diageo Other
Source: Deutsche Bank Source: Deutsche Bank
Africa is structurally advantaged for growth Structurally, Africa is well positioned to grow, and GDP per capita is closely correlated to beer growth, with a 2x multiplier as income expands from US$1000 to an estimated US$5000 per capita;
Population growth in the right age group grows baseline volume. In Africa, the key beer-drinking 20-35 year olds should grow almost 3% per annum.
Figure 7: Per capita consumption and GDP 1991-2013 Figure 8: Annual growth of 20-35 year olds to 2025 3.0% 2.7%
90.0 2.0%
80.0 0.9% 1.0% 70.0 0.4% 60.0 0.2% 50.0 0.0% 40.0 Beer PCC thresholds: -0.2% Per capita GDP US$1,000 - 5,000 ===> Exponential demand growth 30.0 Per capita GDP US$5,000 - 10,000 ===> Slowing demand growth -1.0% Per capita GDP US$10,000 - 15,000 ===> Mature demand, flattish PCC 20.0
Annual PCC beer (litres) beer PCC Annual Per capita GDP US$15,000 ===> Flat to declining PCC 10.0 -2.0% -1.6% -1.9% 0.0 0 5,000 10,000 15,000 20,000 25,000 -3.0% GDP per capita (US$, 1987 constant) -3.3% -4.0% Africa North America Latin America Western Europe Asia Eastern Europe Russia China Japan Brazil Australia USA Mexico Africa (sub)
Source: Deutsche Bank estimates, Plato Logic, World Bank Source: Deutsche Bank, World Bank.
Page 4 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Beer is expensive; pricing is key to unlocking growth Only ~15% of consumers in Africa can currently afford a beer; the crucial tipping point for growth is the need to work only 2 hours or less for a beer;
Per capita consumption is correlated to affordability and the opportunity to convert drinkers from cheaper, home-made and illicit alcohol, which accounts for 80% of all alcohol consumption according to the WHO and company reports;
Below-inflationary pricing accelerates growth in both EM and DM as has been the case in South Africa, Uganda, Zambia and the United States;
The capital intensity of beer and the leverage of volume protect and enhance margins, even when pricing is at or below inflation.
Figure 9: Only 15% of African consumers can afford beer Figure 10: Below-inflationary pricing drives volumes
120.0 120 Beer share of 70% South Africa beer 1973-2003 alcohol in 2001 59% Angola 60%
100.0 100 Beer share of Absolute Alcohol South Africa 50%
80.0 (excl unrecorded) 80
60.0 40% 60 Botswana 30% 40.0
(15+ population) (15+ Burundi 40 Real beer price to CPI 20% 20.0 Beer share of
Per capita Perbeer consumption Kenya Ghana Beer share of AA 20 alcohol in 1973 18% -0.98 correlation 10%
0.0 =100) (CPI CPI to relative price beer Real
0 10 20 30 40 50 60 0 0% R² = 0.5191 % of the population who work<2 hours for a beer (500ml)
Source: Deutsche Bank estimates, PovCal, Company reports, Plato Logic, World Bank Source: Deutsche Bank estimates, company reports, AC Nielsen
Commodity downturn concerns for beer nuanced Commodity downturns are a concern, but we are sanguine on their impact. One-off factors such as elections, excise and agricultural harvests have a more significant effect on beer volume volatility. Oil price declines can work in favor of consumers, where >50% of spend is on food & beverages;
Over the last 20 years, the correlation between oil price movements in Nigeria and beer volumes is limited, both immediately and with a 1-yr lag;
Similarly, correlation between copper price movements in Zambia and beer volumes is limited, both immediately and on a 1-yr lag.
Figure 11: Nigeria beer and oil price movement Figure 12: Zambia beer and copper price movement correlation 1994-2014 correlation 1994-2014 80% 100%
60% 80%
R² = 0.0333 60% 40% R² = 0.0239 40% 20% 20% 0% 0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% y oil copperchangeprice -
o -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% -
-20% y y y OPEC crudeprice oil change
- -20%
o
- y -40% -40% 5 out of 7 years when oil y-o-y beer volume growth price declined have seen y-o-y beer volume growth beer volumes grow
Source: Deutsche Bank, Plato Logic, Datastream Source: Deutsche Bank, Plato Logic, Datastream
Deutsche Securities (Pty) Ltd Page 5
4 February 2015
Beverage Beer
Heineken - the best platform for growth (Buy, TP €70) We favour Heineken given its balanced and superior growth profile, trading at a discount to both beverages and the consumer staples sector;
Heineken’s geographical profile has shifted away from Europe to the right emerging markets, including Africa, Asia ex-China, and Mexico. Its current footprint gives the company a 4% embedded volume growth profile;
The fastest-growing regions for Heineken also have the highest margins, and this should account for 20bps of the annual 40bps margin target;
Patience and capability in brand building have extended beyond the Heineken brand and are being applied to fuller portfolios and innovation.
Figure 13: Transformed balanced footprint for Heineken Figure 14: …with the fastest growth in high-margin areas
100% 4% 5% 16% 90% 14% 18% 18% 14% Africa ME 23% 80% 12% 19% 70% 26% 26% 10% 22% AsiaPac 60% 8% AsiaPac Americas 50% 25% Americas Africa ME 6% 15% 22% 40% 29% C Europe
4% 18 Dbe annualDbe 18 revenue average
W Europe - 30% 7% 6% 2% W Europe 20% 39% 2016 C Europe 36% 0% 26% 10% 22% 0% 5% 10% 15% 20% 25% 30%
0% 2015DBe EBIT margin FY 07 FY 10 FY 15E FY 19E
Source: Deutsche Bank estimates, company reports Source: Deutsche Bank estimates, company reports
SABMiller good potential, short-term concerns (Hold, TP £35) SABMiller has one of the strongest profiles in beer with the capability to deliver on growth, driven by Africa and the Andean regions. Optionality on Castel also exists, though we are doubtful it will materialize anytime soon.
Short-term concerns centre on headwinds in key non-African markets for SABMiller, including Australia and LatAm in FY16;
The SABMiller centralization programmes are needed, but we see them as a cost to do business and a risk to growth, not savings programs;
The chances that ABI will buy SAB (a prospect widely discussed in the press) are minimal, in our opinion. Despite the limitations of the smaller markets, we consider SAB as efficient as ABI and see limited potential for synergies, financially or culturally.
Figure 15: 1% volume regional growth impact on EBIT Figure 16: SAB is as, if not more, efficient than ABI
beer volume mhl (right axis) Colombia SA Beer 60% EBITDA margin% (left axis) 100 MillerCoors Australia 90 52% 53% Peru 50% 80 Castel SA soft drinks 70 Beer volume (mhl) Poland 40% Euador 60 Czech Tanzania 30% 50 China Efes 40 20% Mozambique (%) margin EBITDA 30 Zambia Italy 20 India 10% 10 0.00% 0.02% 0.04% 0.06% 0.08% 0.10% 0.12% 0.14% 0.16% 0.18% 0.20% EBITA group growth on 1% market volume growth 0% 0 SAB Colombia ABInBev Brazil
Source: Deutsche Bank estimates, company reports. Annual, based on 2015DBe Source: Deutsche Bank estimates, company reports
Page 6 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Africa Beer
Africa should lead global growth in beer over the next decade, with almost half of the volume and profit coming from the continent. Population growth in the right age cohort and per capita consumption driven by taking share from illicit alcohol should fuel the growth. We believe Heineken and SABMiller are best positioned to take advantage of the growth. Any corporate activity on the continent would likely involve the remaining family brewer Castel, ancillary beverages such as soft drinks which leverage the brewing platform, and a potential exit by Diageo from beer.
The global beer growth engine
Driver of global beer growth Africa should be the leading Volume growth drives consumer staples growth, with pricing illusionary and continent for growth in the more reflective of inflation than of pricing power. Population growth and per next decade. capita consumption fuel volume growth in consumer staples. This is par- ticularly true in beer, and Africa should be the strongest driver of that growth.
Over the next decade, our analysis indicates that sub-Saharan Africa will account for 37% of the global volume growth.
Figure 17: Global beer volume growth contribution by region
100% 5% 12% 80% 37% Africa
60% Latin America 28% Asia ex-China 40% China Eastern Europe 22% 20% Western Europe North America 0% 1995-2005 2005-2015 2015-2025DBe -20%
Source: Deutsche Bank estimates, Plato Logic, World Bank, company reports
In the decade from 1995 to 2005, volume growth in the global beer industry China accounted for the came from two sources. The post-Communist era opened up Eastern Europe, majority of volume growth in accounting for 31% of the growth. Per capita consumption of beer doubled, the previous two decades, but compounding at 8% annually at the expense of vodka. Asia, led by China, this growth has lacked accounted for 48% of the growth as beer became the primary accompaniment immediate profitability to meals, replacing water, as had been the case in Europe two centuries before. Africa at that time accounted for only 5% of global volume growth.
Deutsche Securities (Pty) Ltd Page 7
4 February 2015
Beverage Beer
The decade from 2005 to 2015 has been dominated by China, moderating in the last several years as per capita consumption hits Asian norms. 70% of the volume in the last ten years has been due to Asia. However, this has not been profitable growth, with both revenues and margins 1/3 of the global average. During the same decade, Africa’s contribution more than doubled as Africa accounted for 12% of growth and a higher proportion of profit growth.
Sustainable margins drive a larger share of the profit The volume growth in Africa is profitable growth.
Figure 18: Africa profit (EBIT) contribution 2015-2025 (2015 US$) Unlike China, volume growth in Africa should equate to 100% profitable growth
80% 37% 42% Africa
60% Latin America 28% Asia ex-China 29% 40% China North America 22% 20% 21% Western Europe 9% Eastern Europe 0% 2025DBe Volume 2025DBE EBIT -20%
Source: Deutsche Bank estimates, Plato Logic, company reports
In constant currency, we see the global profit pool expanding US$11.5 billion by 2025. With dominant market shares and strong moats around current operations, the average 25% EBIT margin US$105 per hl of revenue in the continent should be sustainable and should equate to Africa accounting for almost US$5 billion, or 42%, of the additional profit pool over the next decade.
Figure 19: Regional volume and profit pool growth contribution to 2025 Africa should add US$5bn of the expected US$11.5bn 160 $6.0
additional profit pool in beer Newprofit 2015 140 134 Volume mhl (left axis) by 2025 $4.9 $5.0 EBIT US$bn (right axis) 120 101 $4.0
100 -
$3.3 2025(2015 US$ billions) 2025 2025 (mhl) - 81 80 $3.0 $2.5 60 $2.0 40 New volume 2015 volume New $1.0 $1.0 14 20 12 11 9 $0.3
0 $0.0 Africa Latin Asia ex- China Eastern Western North America China Europe Europe America
Source: Deutsche Bank estimates, Plato Logic, company reports
Page 8 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
We also see Latin America accounting for a significant proportion of the profit growth in the next decade, with a shift to the Andean region and Mexico, away from the historical growth delivered by Brazil. Asian growth ex-China continues to be profitable, with average revenue per hl of US$85 and margin of 25% on average. Markets such as Vietnam and Myanmar should drive the growth.
We don’t see China contributing more than 9% of the incremental profit. In the previous decade, Africa Despite being over 25% of global volume, today its contribution to global profit added double the profit of we estimate at only 4%. We are skeptical on the ability of China to grow its China, despite 1/5th the low revenue per hl (US$35/hl) significantly above inflation. We liberally assume volume that margins in China will expand 500bps of its low base of c. 7%. If we double that figure, Chinese contribution would still be only 16% of the global profit pool expansion.
It is worth noting that Africa’s top-line growth to the profit pool had significantly outperformed China already in the past. Not until 2006 did SABMiller’s China business surpass the contribution of Swaziland.
While China added 250 million hl in the last decade, it expanded the global profit pool just shy of US$700 million. Africa in the same decade expanded its volumes only 1/5th of China, or an additional 50 million hl. Yet it added US$1.3 billion of profit.
Figure 20: Africa and China volume & profit growth 2005-2015
300 Volume mhl (left axis) $1.3bn $1.4 EBIT US$bn (right axis)
247 $1.2 Newprofit 2005 250
$1.0
200
2015 2015 hl) (m -
$0.8 - $0.7bn 2015(2015 US$ bn) 150 $0.6
100 $0.4
New volume 2005 volume New 50 50 $0.2
0 $0.0 China Africa
Source: Deutsche Bank estimates, Plato Logic, company reports
Deutsche Securities (Pty) Ltd Page 9
4 February 2015
Beverage Beer
Parsing the growth in Africa The 8% volume growth in Africa should be driven almost equally by both population growth and per capita consumption.
Figure 21: Drivers of volume growth to 2025 The forecasted annual 8% growth in Africa should be Africa (sub Latin North Western Eastern Sahara) America Australasia Global America Europe Asia Europe driven by population growth 9.0% and per capita expansion 8.0% 7.0% 6.0% 3.6% 5.0% 4.0% 3.0% 2.0% 2.8% 1.0% 1.4% 0.5% 0.6% 4.2% 1.7% 1.0% 0.5% 0.0% 0.6% 0.0% -0.2% 0.0% 0.4% -0.2% -1.0% -0.6% -2.0%
Per Capita Consumption Population
Source: Deutsche Bank estimates, Plato Logic, World Bank
Whereas per capita consumption increases are unlikely in most of the rest of the world and growth should be primarily led by population expansion, Africa has the benefit of both.
In the past two decades, most of the growth in Africa can be attributed to population growth, with per capita consumption hovering around 20 liters. From 2005 to 2015, 5% of annual volume growth came from population expansion, but only 1% from per capita consumption increases.
Figure 22: Africa volume growth 1991-2025
300000 40.0 Volume 35.0 250000 PCC 15+ 2015-2025DBe CAGR Volume: 8% PCC: 4% 30.0 200000 2005-2015DBe CAGR 1995-2005 CAGR Volume: 6% 25.0 Volume: 3% PCC: 1% 150000 PCC: 0% 20.0
15.0
100000 Volume ('000Hl) Volume 10.0 50000
5.0 Per Capita Capita PerConsumtion (pop15+) 0 0.0
Source: Deutsche Bank, Plato Logic, World Bank
Page 10 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Historical precedence shows strong growth acceleration when per capita consumption works in conjunction with population-driven expansion. In the United States, the decade after the Civil War from 1865 to 1875 saw volume rise 10% annually, 70% of which was driven by per capita consumption.
Figure 23: US volume and PCC 1865-1895 Figure 24: China volume and PCC 1990-2010
45,000 60.0 500000 45.0 1885-1895 CAGR Volume
Volume (Hl) 2000-2010 CAGR 15+) (pop Consumption Capita Per 40,000 450000 Volume: 6% Volume: 8% 40.0 PCC (All) PCC: 4% 50.0 (all Per population)Consumption Capita PPC 15+ 400000 PCC: 7% 35,000 35.0 1875-1885 CAGR 350000 30,000 Volume: 7% 40.0 1990-2000 CAGR 30.0 PCC: 5% 300000 Volume: 7% PCC: 9% 25,000 1865-1875 CAGR 25.0 Volume: 10% 30.0 250000 PCC: 7% 20,000 20.0
200000 Volume ('000Hl)
Volume ('000Hl) Volume 15.0 15,000 20.0 150000 10,000 100000 10.0 10.0 5,000 50000 5.0
- 0.0 0 0.0 1865 1870 1875 1880 1885 1890 1895 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Source: Deutsche Bank, Beer Institute Source: Deutsche Bank, Plato Logic, World Bank
In Africa, the most obvious examples are South Africa and Angola. South Africa from 1960 to 1980 saw 10% volume expansion with per capita consumption expanding 7% per annum. Similarly in China, the conversion of water with meals to beer (which in our experience is frankly quite close to water in China), per capita consumption drove the volume growth over the decade. We project the per capita consumption to be close to its potential peak.
Deutsche Securities (Pty) Ltd Page 11
4 February 2015
Beverage Beer
HEIN and SAB best positioned to capture growth
Globally embedded growth makes beer a company call As we outlined in our report on July 29th 2014, Beer: Tapping into Growth, being in the right geographies with the right population dynamics and per capita potential makes beer a company call rather than a sector call. As such, we estimate Heineken and SABMiller have the best embedded volume growth profile in beer over the next decade and beyond (Figure 25 and Figure 26)
Figure 25: Brewers growth profile on base Figure 26: Brewers CAGR volume growth
160% 4.0% 10 year CAGR to 2025 140% 3.5% 2050 population 3.0% 120% growth 35 year CAGR to 2050 2.5% 100% 2025 population growth 2.0% 80% Embedded per capita 1.5% 60% growth 1.0% 40%
% growth on currentgrowthon% base 0.5% 20% 0.0% Heineken SABMiller AB Inbev Carlsberg 0% Heineken SABMiller AB Inbev Carlsberg
Source: Deutsche Bank estimates, Plato Logic, World Bank, company reports Source: Deutsche Bank estimates, Plato Logic, World Bank, company reports
Africa most relevant to Heineken and SABMiller For both SABMiller and Heineken, we see Africa as a core driver of volume Beer in Africa is most relevant growth in the next decade. Currently, their Africa divisions account for over to SABMiller and Heineken 20% of their profits. Castel’s beer business is 100% Africa-based.
Figure 27: Relevance of Africa to 2015 DBe group revenue and EBIT
30%
25% 25% EBITA 22% Revenue 20%
15%
11% 10%
4% 5%
0% SABMiller (Africa Heineken (Africa Diageo (Africa Eastern Diageo Africa Beer subsidairies only) Middle East Europe Middle East) only consolidated)
Source: Deutsche Bank 2015 estimates, company reports
Page 12 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Diageo’s Africa, Eastern Europe & Middle East division accounts for 11% of group profit. We estimate that Africa beer (excluding spirits) accounts for only 4% of group profit.
Who is best positioned to capture the growth in Africa? We expect Africa’s volumes to grow 8% per annum over the next decade and see Heineken as best positioned, with potential to capture over 30% of the growth.
Figure 28: Proportional volume growth in Africa Figure 29: Share of the growth in Africa
300 Delta ZimOther 2% 1% 259m hl Diageo 250 16% Diageo Heineken 8% CAGR 31% 200 Castel
150
Million Hl Million 124m hl Diageo SABMiller 100 Castel Castel 23%
50 SABMiller Heineken Heineken SABMiller (subs 0 only) 2015DBe 2025DBe 27% Heineken SABMiller Castel Diageo Other
Source: Deutsche Bank estimates, Plato Logic, company reports Source: Deutsche Bank estimates, Plato Logic company reports
SABMiller should capture over a quarter of the growth and its associate, family brewer Castel, is well positioned to benefit on the back of its platform in West Africa.
Relevance to group growth On their current beer bases, Heineken and SABMiller should be able to Beer growth in Africa should continue to deliver in Africa with 9% and 8% volume growth, respectively, ex- be of the greatest relevance South Africa – this continues the trend seen in the past decade. For Heineken, to Heineken the growth in Africa represents greater upside for the group overall and should add 25% to current EBIT
Figure 30: Beer volume growth in Africa Figure 31: Additional Africa EBIT to group EBIT by 2025
200% CAGR 1995-05 2005-15e 2015-25e SABMiller 2% 3% 6% 40% 180% ex-SA 3% 8% 12% Castel 4% 9% 7% 35%
160% Heineken 5% 9% 9% EBIT 140% Diageo 5% 4% 11% 30%
120% 25%
2025 2025 e goup EBIT e goup 100% 20%
80% 2015 15% 60% 10%
Volumegrowth per decade 40%
Africa forecatedAfrica 5% 20% to relative 0% 0% SABMiller Castel Heineken Diageo Heineken SABMiller Diageo
Source: Deutsche Bank estimates, Plato Logic Source: Deutsche Bank estimates, company reports
Deutsche Securities (Pty) Ltd Page 13
4 February 2015
Beverage Beer
On its current beer base, Diageo could potentially grow 11% per annum. However, it has had the same potential over the last two decades, and not converted thereon.
Favoring Heineken to deliver on its potential Heineken delivered 9% CAGR volume growth in sub-Saharan Africa over the last decade. Some of this is inorganic, but we expect the same trend to continue organically in the next decade. In addition to its leadership position in Nigeria, the DRC, Ethiopia, Rwanda and Burundi should be sizable contributors.
Figure 32: Heineken Africa volume growth Figure 33: Heineken FY14-FY18 EBIT split
80,000 100% 73m hl
90% 23% 70,000 27% 26% 25% 24% 80% W Europe 60,000 9% CAGR 6% 7% 6% Ethiopia 70% 8% 7% C Europe 50,000 Burundi 18% 60% 18% 18% AsiaPac Rwanda 18% 18% Americas 40,000 50% 31 mhl DR Congo Africa ME 9% CAGR 40% 26% 30,000 26% 26% 26% 26% Volume (Hl (Hl Volume'000) 5% CAGR 30% 20,000 14 mhl 8mhl Nigeria 20% 26% 27% 10,000 10% 21% 22% 24%
- 0% FY 14E FY 15E FY 16E FY 17E FY 18E 1995vol 2005vol 2015vol 2025 vol
Sub Saharan Africa only Africa and Middle East as per company description Source: Deutsche Bank estimates, Plato Logic Source: Deutsche Bank estimates, company reports
Currently, the Heineken Africa Middle East division represents 22% of profit. We model the African division to surpass the contribution of Western Europe by FY17 and exceed combined Europe by FY19.
SABMiller building on a strong base In Africa, SABMiller should be able to deliver 6% volume growth annually - 12% excluding the relatively mature market of South Africa.
Figure 34: SABMiller Africa progression Figure 35: SABMiller FY15-FY19 EBIT split
90,000 100% 82m hl 13% 13% 13% 13% 12% 80,000 6% CAGR 90% 12% ex SA 80% 70,000 N America 70% 35% 34% 35% 35% 36% Nigeria 60,000 Latin America 3% CAGR Moz 60% 50,000 44m hl Europe 8% ex SA Uganda 50% 2% CAGR 10% 9% 9% 8% 8% 40,000 3% ex SA Asia 33m hl Tanzania 40% 10% 10% 10% 11% 11% 30,000 27m hl Volumes (Hl (Hl Volumes'000) 30% Africa
20,000 20% SA 31% 32% 33% 34% 35% 10,000 10%
- 0% 2015E 2016E 2017E 2018E 2019E 1995vol 2005vol 2015vol 2025 vol
Source: Deutsche Bank estimates, Plato Logic Source: Deutsche Bank estimates, company reports
The newly combined Africa division now accounts for almost a third of group profit. We expect that the amalgamation of the South Africa and Africa divisions last year will be beneficial for growth in the continent as more experienced resources are deployed north of the Limpopo River.
Page 14 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Diageo – the risk to beer growth in Africa On paper, Diageo should grow its produced beer volumes 11% per year over the next decade. History, however, suggests otherwise – and we believe the company presents the biggest potential to underperform in terms of beer growth in Africa. Despite being in high-growth Nigeria and Kenya, the company has only managed to produce 4% beer growth as it deployed its focus on spirits rather than beer. Over that time, Diageo has been a share donor in Uganda and Ghana, losing approximately 1000bps and 2500bps of beer share in each market, respectively.
Figure 36: Diageo beer volume growth by decade Figure 37: Diageo organic growth by category
40000 10% 34 mhl 35000 8%
30000 6% 11% CAGR 25000 4% Uganda 20000 2%
15000 Nigeria
4% CAGR 12m hl 0% Volume (Hl (Hl Volume'000) 5% CAGR 10000 8m hl -2% 5m hl Kenya 5000 -4% 2010 2011 2012 2013 2014 CAGR 0 Beer (ex Guinness) Guinness Spirits Group 1995vol 2005vol 2015DBe volume 2025DBe volume
Source: Deutsche Bank estimates, Plato Logic Source: Deutsche Bank estimates, company reports
To unlock the potential of beer, we believe Diageo would benefit from a review of its operating model in Africa, including potentially selling its beer operations as we discuss on page 28.
Castel - an efficient and independent business Below-inflationary pricing and an efficient cost structure have seen independent family group Castel accelerate growth in markets such as Angola and Cameroon over the last decade. We believe the company is well positioned to possibly double its volume over the next decade, led by its leading position in Ethiopia.
Figure 38: Castel beer volume growth by decade Figure 39: Castel volume split 2015DBe
Cote d'Ivoire Gabon 70,000 Congo, Dem. Rep. 7% 5% Burkina Faso 7% 61mhl 4% 60,000 Madagascar Ethiopia 4% Togo 8% Benin 2% 50,000 7% CAGR 3%Morocco 2% Chad Senegal 2% 40,000 1% 9% CAGR 30 mhl DR Congo Cameroon Equatorial Guinea 1% 30,000 17% Ethiopia Guinea 1% Volume (Hl (Hl Volume'000) Angola 20,000 Cameroon CAR 4% CAGR 36% 0% 12 mhl Guinea-Bissau 10,000 8 mhl 0% Angola Gambia 0% - 1995vol 2005vol 2015DBe volume2025DBe volume
Source: Deutsche Bank estimates, Plato Logic Source: Deutsche Bank estimates, company reports
Deutsche Securities (Pty) Ltd Page 15
4 February 2015
Beverage Beer
Realistic pricing unlocks and protects growth
Few can afford a beer We estimate that only 15% of consumers in Africa can afford a beer. As Consumers can afford a beer discussed in our note Beer - Tapping into Growth and replicated in Figure 171, when having to work less the inflection for beer affordability is ~2 hours of work. Not surprisingly, the than 2 hours for it share of adults who can afford a beer on that measure is strongly correlated to the per capita consumption in a market (Figure 41)
Figure 40: Share of adults who can afford a beer in Africa Figure 41: PCC and share of adults who can afford a beer
60 120.0 R² = 0.5191 50 Share of adults who work less than 2 100.0 Angola hours to buy and afford a 500 ml beer South Africa 40 80.0
30 60.0
20 Botswana 40.0
(15+ population) (15+ Burundi
10 % who can afford a 500ml beer 500ml a afford can who % 20.0
Per capita Perbeer consumption Kenya Ghana 0
0.0
CAR
Togo
Chad
Benin
Africa
Kenya
Gabon Ghana Liberia
Malawi
Angola
Nigeria
Guinea
Zambia Burundi
Uganda 0 10 20 30 40 50 60
Lesotho
Ethiopia
Rwanda
Namibia
Tanzania
Botswana
Swaziland
DR Congo DR Cameroon
South Africa South % of the population who work<2 hours for a beer (500ml)
Madagascar
Cote d'Ivoire Cote
Congo, Rep. Congo,
Sierra Leone Sierra
Mozambique Gambia, The Gambia, Burkina Faso Burkina Source: Deutsche Bank estimates, PovCal Source: Deutsche Bank estimates, PovCal, Plato Logic, World Bank
Affordability is driven by two factors: One, the macro environment, which stimulates GDP growth. This rising tide has helped all brewers in Africa and should do so for the foreseeable future. Besides ensuring a presence in the right zip code, the brewers cannot do much to influence this factor. Two, the discipline to price consistently below inflation to get consumers into the category through increased affordability. When applied, growth accelerates. It is in the brewers’ power to do so, but clearly with some reluctance.
Pricing below inflation drives growth, adds new drinkers, drives consumption Pricing below inflation in South Africa over a 20-year period halved the price of beer in real terms and quintupled per capita consumption. Because of the high capital intensity of brewing, the operational leverage driven by the resultant volume growth doubled margins despite pricing below inflation. Figure 42: South Africa real pricing and alcohol share Figure 43: South Africa per capita growth 1961-2001
120 Beer share of 70% 30,000 140.0 alcohol in 2001 Volume ('000hl) 1980-1990 CAGR 59% Volume: 7%
60% (all population) Consumption Per Capita 100 PCC 15+ 120.0 Beer share of Absolute Alcohol 25,000 PCC: 4%
50%
(excl unrecorded) 1970-1980 CAGR 100.0 80 20,000 Volume: 10% PCC: 7% 40% 1960-1970 CAGR 80.0 60 15,000 Volume: 11% 30% PCC: 8% 60.0
40 Volume ('000Hl) Real beer price to CPI 20% 10,000 Beer share of Beer share of AA 40.0 20 alcohol in 1973 18% -0.98 correlation 10% 5,000 Real beer price relative to CPI (CPI =100) (CPI CPI to relative price beer Real 20.0 0 0% - 0.0 1961 1966 1971 1976 1981 1986
Source: Deutsche Bank, SAWIS, SACBA, SAB< ACNielsen Source: Deutsche Bank estimates, company reports, ACNielsen
Page 16 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
In West Africa, when contrasting Nigeria and Cameroon we see two markets Beer is 30% cheaper in with similar profiles, both also including a large share of Muslims in the Cameroon than in Nigeria. population, which presumably limits alcohol consumption. Per capita Per capita consumption is consumption in Cameroon, however, is 2.5x Nigeria’s. For years, the duopoly 2.5x higher as result of Heineken and Diageo has priced at or above inflation. Their high prices have been masked by the high inflation environment. In contrast, in Cameroon pricing is more difficult. The CFA currency is pegged to the euro, with inflation in line with European norms. Reasonable pricing by Castel’s Brasseries du Cameroun over the last 20 years has resulted in a price point 30% below that in neighboring Nigeria, stimulating growth.
Figure 44: Nigeria and Cameroon pricing and PPC Figure 45: Uganda and Zambia per capita consumption
$1.80 60 20
Per capita consumption ltr (population Beer shareof alcohol Benefiting from an $1.60 18 excise reduction, Nile 18 Nigeria: 9% Breweries launches 17 48.7 50 $1.40 Cameroon: 45% 16 Eagle Lager at a 30% discount to mainstream
$1.20 40 14 ml beer ml
500 $1.00 12 30 10 $0.80 10
$0.60 19.3 20 8 8 US$ price of a a of price US$ $0.40 6 Zambian government reduces beer
10 excise from 75% to 60% in 2009 15 $0.20 +) 4 and 60% to 40% in 2010 to combat Per Capita consumption (litres 15+) (litres consumptionCapita Per illicit alcohol. In 2014 raised back to Uganda $- 0 2 60% Nigeria Cameroon Zambia 0 Price of beer (left axis) PCC 15+ (right axis) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Deutsche Bank estimates, Plato Logic, Euromonitor, World Bank Source: Deutsche Bank, Plato Logic, World Bank
Both Uganda and Zambia have experienced similar price reductions in the last decade, driven by initiatives reducing the excise component of beer. The brewers tend to report revenue, net of excise. Yet excise is a real cost of beer borne by the consumer, which can be managed as seen in those two markets.
In Uganda, the introduction of Eagle lager by SABMiller’s Nile Breweries, a “We aim to halvethe price of beer made primarily with local sorghum instead of barley, received an excise beer in Africa.” reduction from 60% to 20%, effectively reducing the consumer price 30%. The CEO SABMiller Africa reduction in excise has been sustainable as the company developed over February 2011 12,000 farmers to supply the brewery and ensured and guaranteed the government a set excise amount. Per capita consumption in Uganda has more than doubled as result in the last decade. Diageo attempted a similar initiative in Kenya with its Senator brand. However, the government received 0% excise and no direct financial benefit. It was thus not difficult for the Kenyan government to reverse its decision, which it did in 2013.
In Zambia, SABMiller’s Zambian Breweries argued for an excise reduction from 75% to 60% as a means to combat illicit alcohol. The effective reduction led to a consumer discount of 30%, increasing per capita consumption to 17 litres. In 2014, the government partially reversed its decision. We wait to see the long- term impact or whether the company is able to convince the new government post the February elections of its view.
SABMiller has an active program to halve the price of beer, through pricing, transactional packs, new products or with help from the governments as above. By halving the price of beer, the share of adults in Africa who can afford a beer moves from 15% to 40%, on our estimate.
Deutsche Securities (Pty) Ltd Page 17
4 February 2015
Beverage Beer
Figure 46: Dominant market shares and Herfindahl index in Africa
Tunisia 1.7m hl Morocco Castel 0.8m hl Castel (5)
Algeria 1.4m hl Castel (5) Egypt 1.3m hl Heineken Heineken
Senegal 0.2m hl Castel
Guinea-Bissau Mali 0.1m hl 0.2m hl Niger Castel 0.1m hl Castel Chad Guinea 0.6m hl 0.2m hl Burkina Faso 1.2m hl Castel Castel Nigeria Ethiopia Castel Sierra Leone 19.6m hl 4.4m hl 0.2m hl Cote d’Ivoire Heineken South Sudan Castel Heineken 2.1m hl Heineken Castel CAR 0.6m hl 0.2m hl SABMiller Liberia Cameroon Castel Uganda 0.2m hl 6.5m hl 3.5m hl Monrovia Castel SABMiller Breweries (3) Diageo Ghana Kenya 2.0m hl 5.0m hl Diageo (2) Benin DR Congo Diageo Rwanda SABMiller 1.0m hl 5.3m hl 1.5m hl Castel Heineken Togo Heineken Burundi 0.6m hl Equatorial Guinea Castel 1.9m hl Castel 0.2m hl Tanzania Heineken Castel 4.0m hl Malawi Gabon SABMiller 0.3m hl 1.5m hl Carlsberg Castel Angola 12.1m hl Rep. Of Congo Zambia 2.2m hl Castel 1.4m hl Heineken SABMiller Mozambique 2.4m hl SABMiller Madagascar Zimbabwe 1.2m hl 1.6m hl Castel 2015DBe Africa (SS) volume share Delta Namibia 1.4m hl Botswana 5% Namibian 0.6m hl SABMiller Breweries(1) SABMiller 24% 36% Heineken Swaziland 0.3m hl Diageo South Africa SABMiller 10% Castel 31.6m hl SABMiller Lesotho Other 0.4m hl 25% SABMiller
Market power/concentration >0.25 = high Market leader 0.15-0.25 = moderate Heineken <0.15= low SABMiller Castel China Diageo Poland USA Other Ethiopia South Sudan Uganda Ghana Congo, Dem. Rep. Sierra Leone Nigeria Tanzania Senegal Cameroon Liberia Botswana Zambia Angola South Africa Namibia Guinea Madagascar Benin Burkina Faso Rwanda Gabon Cote d'Ivoire Chad Swaziland Mozambique Lesotho Central African Republic Mauritius Kenya Zimbabwe Morocco Malawi Equatorial Guinea Togo Seychelles Congo, Rep. Cabo Verde Burundi 0 0.2 0.4 0.6 0.8 1 Herfindahl Index
Significant cross holdings - SABMiller has a share in Castel operations of 20%, with the exception of Algeria and Morroco (40% share) and Angola (27.5%) - SABMiller has a 40% share of Delta Beverages in ZImbabwe - Castel has a share of SABMiller Africa of 38&, with the exception of South Africa (none). Nigeieria (49.9%) and South Sudan (20%) - Heineken in South Africa joint venture and has 42.25% with Diageo (42.5%) and Namibiian breweries (15.5%) - Diageo has a joint venure in Ghana (50% share) with Heineken (20% share)
3Source: Deutsche Bank estimates, Plato Logic, Company reports
Page 18 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
First-mover advantage has created a moat to protect profit growth… As can be seen in Figure 46, the brewers in Africa have strong, quasi- Most markets in Africa are monopolistic positions. When using the Herfindhal index of market power dominated by a single brewer concentration, all the markets would be considered highly concentrated, entrenching profitability. The high capital intensity of brewing, the required infrastructure investments in the full value chain, the product intrinsics of beer and the emotional nature of beer are all difficult for a new entrant to replicate.
…but don’t get too greedy The strong market positions, however, have also led to brewers mistakenly interpreting these positions as providing them with strong pricing power. This is not the case – and creates an opportunity for competitors to enter.
Following the exchange of crossholdings in 2002 with Diageo’s EABL, Excessive pricing and margin Tanzania Breweries (TBL) effectively had 95% market share. Over the next expansion create an umbrella decade, the company reduced marketing spend, cut investment in sales, for others to enter simplified the portfolio, and raised pricing at or above inflation annually, lifting EBIT margins to almost 45%. They created a margin ‘umbrella’ that allowed a competitor to enter – namely Serengeti Breweries, launched in 2004, which quickly gained 20% share.
Its success caused EABL/Diageo to reassess the strategic alliance and crossholdings, and purchase Serengeti in 2010, (re)gaining an attractive foothold in what should have been a protected market.
Figure 47: Nigeria and Tanzania rev and margin at point of competitive entry
$250 50% 45% $200 40% 35% $150 30% 25% $100 20% 15%
Net Revenue per Hl (US$) Hl per Revenue Net $50 10% EBIT margin on net revenue net on margin EBIT 5% $0 0% Africa Nigerian Guinness Tanzania average breweries Nigeria 2012 Breweries 2012 2006
Net revenue/Hl (left axis) EBIT Margin (right axis)
Source: Deutsche Bank estimates, company reports
Similarly in Nigeria, pricing above inflation and excessive margins by Diageo and Heineken led to a comfortable pricing umbrella for SABMiller to enter the market in 2011 at a lower price. Though the price is lower in Nigeria, on an African and global level, the “value brands” are in line and the market as a result is back in accelerated growth driven by below-premium.
Deutsche Securities (Pty) Ltd Page 19
4 February 2015
Beverage Beer
Population and GDP drive structural growth
Population growth and leading GDP growth rates help make Africa the right 20-35 year olds (demographic place for consumer staples now. It is particularly attractive for beer, as the that tends to drink the most population boom is occurring in the right age cohort, and the phase of GDP beer) are expanding 2.7% per growth positively impacts beer disproportionally, annum in Africa Population dynamics to drive half the growth Africa should lead the globe in population growth and by 2025 is expected to have added 383 million new consumers, accounting for 39% of global growth.
Figure 48: Africa to lead global population growth Figure 49: CAGR growth of 20-35 year olds to 2025
12 3.0% 2.7%
10 2.0%
0.9% 8 1.0% 0.4% 0.2% 6 0.0% -0.2%
4 -1.0% Population(Billion) 2 -2.0% -1.6% -1.9%
0 -3.0%
-3.3%
2010 1950 1960 1970 1980 1990 2000
2030E 2040E 2050E 2060E 2070E 2080E 2090E 2100E 2020E -4.0% Russia China Japan Brazil Australia USA Mexico Africa Asia Africa Rest of world (sub)
Source: Deutsche Bank, World Bank Source: Deutsche Bank, World Bank
More relevant for beer is the 20-35 year-old cohort, the age group that represents the time when people establish the habit of drinking beer, entrench their brand choices, and usually drink ¾ of their lifetime beer consumption.
Figure 50: Growth of 20-35 year olds in Africa
4.0%
3.5% 2025 3.0% 2.5% 2.0%
year olds to olds year 1.5% 35 35
- 1.0% 20 0.5% 0.0% -0.5%
-1.0%
Annual growth of growth Annual
Togo
Chad
Benin
Africa
Kenya
Eritrea
Bissau
Gabon Ghana
Liberia
Angola Malawi
Nigeria
Guinea
-
Zambia
Burundi
Uganda
Lesotho
Ethiopia
Rwanda
Senegal Namibia
Morocco
Comoros
Mauritius
Tanzania
Botswana
Swaziland
Zimbabwe
Cameroon
Cabo VerdeCabo
South Africa South
Madagascar
Cote d'IvoireCote
Congo, Rep. Congo,
Mozambique Leone Sierra
South Sudan South The Gambia,
Burkina Faso Burkina
Guinea
Equatorial Guinea Equatorial
Congo, Dem. Rep. Dem. Congo, Sao Tome and Principe Tome Sao Central African RepublicAfricanCentral Source: Deutsche Bank, World Bank
In Africa, this key age key cohort should grow on average 2.7%, or 6 million new consumers per year, with Uganda, Ethiopia and the Democratic Republic of Congo enjoying an even greater population dividend. That is the equivalent of adding another Germany of beer drinkers in the right age group every year.
Page 20 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Plenty of per capita consumption in alcohol, just not beer Figure 51: Beer’s real competition is In most developed markets, beer accounts for 50-60% of alcohol consumption, African home-made millet beer with other alcohols, such as spirits and wine, priced above beer. Thus, beer is generally the cheapest such beverage that people drink. But in most African markets, beer accounts for 10-30% of alcohol, with other alcohols such as millet beer, palm wine, and gin making up the rest and sold at half the price or less. Here, beer is often the most expensive beverage that people drink.
Figure 52: Beer share of alcohol in Africa
70%
60%
50% Brazil and USA level
40%
30%
20% Source: Deutsche Bank, personal collection Beer shareBeerof Alcohol 10%
0%
Mali
Togo
Chad
Niger
Benin
Kenya
Bissau
Ghana
Gabon
Liberia
Angola
-
Algeria
Guinea
Nigeria
Zambia
Malawi
Uganda
Gambia
Senegal
Lesotho Burundi
Rwanda
Ethiopia
Namibia
Tanzania
Mauritius
Botswana
Swaziland
DR Congo Congo DR
Cameroon
Zimbabwe
Congo Braz Congo
Cape Verde Cape
Madagascar Madagascar
South Africa South
Sierra Leone Sierra
Côte d'Ivoire Côte
Burkina Faso Burkina
Mozambique Guinea
Central African Republic African Central Source: Deutsche Bank estimates, WHO
Pricing, rather than a desire to consume, is the key barrier, as discussed earlier. Africa has reached less than Africa has reached less than 30% of its potential per capita beer consumption. 30% of its potential per capita There is plenty of growth opportunity left to increase per capita consumption consumption as beer takes share from illicit alcohol. Our growth estimates (which we consider conservative) incorporate cultural, religious and physical limitations.
Figure 53: African markets’ per capita consumption versus potential
120 Long term per capita consumption potential 100 Per Capita Consumption Brazil 2015 PCC 2015DBe USA 2015 PCC 80
60 Japan 2015 PCC China 2015 PCC 40
20 Per Capita Capita Perconsumption (populationaged 15+)
0
Togo
Chad
Benin
Kenya
Bissau
Ghana
Gabon
Eritrea
Liberia
Angola
-
Guinea
Nigeria
Zambia
Malawi
Uganda
Gambia
Senegal
Burundi
Lesotho
Rwanda
Ethiopia
Namibia
Tanzania
Morocco
Mauritius
Botswana
Swaziland
Zimbabwe
Cameroon
Congo, Rep. Congo,
Madagascar
South South Africa
SierraLeone
South South Sudan
Cote d'Ivoire Cote
Burkina FasoBurkina
Mozambique
Guinea
Equatorial Guinea Equatorial Congo, Dem. Congo, Rep.
Central African Central Republic Source: Deutsche Bank estimates, Plato Logic, World Bank
Deutsche Securities (Pty) Ltd Page 21
4 February 2015
Beverage Beer
Relevant GDP growth as a driver Much has been written on the correlation of GDP growth to beer, which is a bit like observing that wings help birds fly. The key nuance for beer consumption is the phase of GDP growth. Africa is at the cusp of a phase, where beer growth generally accelerates.
Figure 54: Region per capita beer consumption and GDP 1991-2013 The correlation between GDP and beer growth is most
90.0 relevant between $1000 and 80.0 $5000 70.0 60.0 50.0 40.0 Beer PCC thresholds: Per capita GDP US$1,000 - 5,000 ===> Exponential demand growth 30.0 Per capita GDP US$5,000 - 10,000 ===> Slowing demand growth Per capita GDP US$10,000 - 15,000 ===> Mature demand, flattish PCC 20.0
Annual PCC beer (litres) beer PCC Annual Per capita GDP US$15,000 ===> Flat to declining PCC 10.0 0.0 0 5,000 10,000 15,000 20,000 25,000
GDP per capita (US$, 1987 constant)
Africa North America Latin America Western Europe Asia Eastern Europe
Source: Deutsche Bank estimates, Plato Logic, World Bank
GDP breaking above the US$1000 barrier tends to be the point of acceleration, with a multiplier effect on beer of almost twice the growth of GDP. When looking at the beer markets since 1991, we find that the phase of growth between US$1000 and US$5000 has been most beneficial to beer.
Figure 55: GDP multiplier on beer volume 1991-2013 Coefficient R-square Africa 1.7 0.63 Latin America 1.1 0.31 Eastern Europe 0.8 0.52 Asia 0.4 0.05 Asia ex-China 0.6 0.30 China 2.1 0.54 Western Europe 0.3 0.22 North America 0.3 0.17 Source: Deutsche Bank estimates, Plato Logic, World Bank
Page 22 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Beer’s impressive ability to manage the headwinds
The diversification of zone CNN We have had the pleasure of visiting and working in 37 of the 54 African “AOA, Asia Oceania and markets. As Nestle’s CEO once put it, with such diversity, it is almost inevitable Africa- we call it sometimes, that a CNN crew is ever-present. In Africa, each generalization has a multitude with a little twinkle in the eye- of exceptions. In a basket of 54 markets, oil price, commodity cycles and zone CNN. There is always currency movements have different and often independent rather than something in the news.” interdependent impacts. Core commonalities, however, are appearing – creating a more robust continent. Albeit of a low base, better governance, transparency, infrastructure and agricultural self-sufficiency are becoming the CEO Nestle norm. October 2013
The impact of commodities The commodity cycle impacts beer and lower oil prices, but we are sanguine about any potential negative effects. Though rising commodity prices undoubtedly have helped some African markets in the past decade, it is worth noting that those countries without significant commodities have also performed well. The correlation between the commodity cycle and beer growth is also hard to parse. In Nigeria, as a heavily dependent oil-exporting country, we see no correlation.
Figure 56: Nigeria beer and oil price movement Figure 57: Nigeria beer performance in declining oil correlation 1994-2014 prices 80% OPEC Oil price avg annual movement Beer annual volume growth 10%
60% 5% R² = 0.0333 5% 40%
0% 20%
-5%
0% change y
-
o -
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% y
-20% -10%
y y OPEC crudeprice oil change
-
o
- y -40% -15% y-o-y beer volume growth -18% -20% Source: Deutsche Bank , Datastream, Plato Logic Six years between 1994-2014- 1997, 1998, 2001, 2009, 2013, 2014 DBe Source: Deutsche Bank, Datastream, Plato Logic
In the six years that oil was down, the average decline for oil was 17%, while the beer market grew on average. In 2009, when the oil price declined 35%, beer grew 5%, rising double digits on both sides of that year. It can be argued that the benefits of a high oil price in Nigeria tended to focus on those consumers who had bank accounts in Switzerland. On the way down, those same consumers will be hurt, which most likely has a disproportionate impact on Johnny Walker Black, rather than mainstream Star beer.
Zambia’s economy is dependent on copper. Yet over the last 20 years, fluctuations in the copper price seem to have had no direct correlation with beer growth. In the nine years that copper was down on average 13%, beer volumes were a mediocre 2%. In the last four copper price declines, however, beer grew 13% annually. The government adjusting excise rates, weather- dependent agricultural outputs as well as SABMiller’s capital investment after many years of under-investment had bigger effects than any copper price decline.
Deutsche Securities (Pty) Ltd Page 23
4 February 2015
Beverage Beer
Figure 58: Zambia beer and copper price Pearson Figure 59: Zambia beer performance in declining copper correlation 1994-2014 prices 100% LME Copper price avg annual movement Beer annual volume growth 15% 13% 80%
60% 10% R² = 0.0239 40% 5% 2% 20% 0%
0%
y y oil copperchangeprice -
o -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% -
y last 9 negative copper price -20% -5% cycles (1996-1999, 2001, 2008, 2009, 2012, 2013) -40% -10% last 4 negative copper price y-o-y beer volume growth cycles (2008, 2009, 2012, 2013) -11% -13% -15%
Source: Deutsche Bank, Plato Logic, Datastream Nine years between 1994-2014: 1996-1999, 2001, 2008, 2009, 2012, 2013 Source: Deutsche Bank, Plato Logic, Datastream
We are not saying that commodity cycle factors will have no short-term impact on beer sales in Africa, but we are aware that the usual other factors, such as excise, producer pricing, and a good harvest, are always in play and probably have a bigger impact.
There are also parts of Africa for which the commodity cycle has been less relevant. Ethiopia and Rwanda have posted 11% and 8% CAGR in GDP over the last decade, respectively. The only real commodity in their stable is coffee. There, growth is more a product of good governance and a stable political environment.
Beer is a more hardy good than other products When consumers enter the cash economy, beer often becomes one of the first beneficiaries, ahead of other HPC and packaged food products. Commercially produced lager replaces unhygienic and illicit alcohol. Perhaps not surprisingly, this seems to have a higher priority for a consumer with a US$1 in his pocket than buying Maggi cubes over salt, or Ritz crackers over homemade (and often tastier) plantain chips.
Beer is also one of the last items that people tend to drop. It is hard to go back to the homemade stuff. It is also difficult socially to revert to the back of the tavern with the flies and the unhygienic products that the bar owner keeps there.
Page 24 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
African M&A
Africa brewing is no short-term game. SABMiller’s leading presence in Africa is as a result of developing markets for more than 35 years in Southern Africa and 20 years in East Africa. Heineken started in the Congo in 1923 and has been invested in Nigeria since 1957. Guinness established its first brewery outside Ireland and Great Britain in Lagos, Nigeria, in 1962. Castel started its first brewery in Gabon in 1967. Given the high barriers to entry coming from first-mover advantage, Africa offers only a few potential M&A opportunities of material impact.
We see three potential routes of corporate activity in Africa involving the brewers: the Castel family holding, further consolidation in ancillary drinks to leverage the brewing platform, and Diageo exiting the operational aspects of selling beer.
Castel, perhaps one day, just not the way you might think For the sake of completeness, in Figure 219 based on the lower end of recent “It is unlikely a deal will transactions in brewing, we conservatively value the Castel Africa beer and happen under Pierre Castel, soft drinks business at US$30 billion on a 12x FY16E multiple should any party but it is possibly more doable buy the business outright. With SABMiller holding a 20% stake along with with the next generation. It is various rights to purchase at an agreed formula, much ink has been spilled on more a question of ‘when’ possible timelines (often linked to the specter of the Castel chairman retiring, as the SABMiller CFO recently said) and structures of a potential deal. than an ‘if’.” Questions have also been asked about what might happen to the rights to CFO SABMiller purchase Castel should SABMiller itself be an acquisition target as extensively June 2014. covered in newspaper reports (an event that we consider unlikely, discussed more extensively on page 59). Over time, the company has given numerous responses to that question. Moreover, it is not the relevant question, in our opinion. We see three considerations that we view as more relevant:
1. Its strategic alliance with SABMiller benefits Castel more than SABMiller
Families tend to exit the beer business when they are under competitive threat (e.g. Bavaria in Latin America), there is lack of control (e.g. Anheuser Busch) or there is generational discord. Heineken’s independence can be partially attributed to the fact that none of those factors apply. The same is true for Castel.
The core focus for the Castel family (which extends quite widely in the business beyond the chairman) has been to protect its profit pools in Africa. Their businesses enjoy unrivaled leadership positions. When there is a threat, the companies have been co-opted (Castel has brand license agreements with the four main brewers), or in the case of SABMiller, alliances have been agreed. From Castel’s perspective, it seems the purpose of the original alliance agreement with SABMiller was to prevent the company from entering Francophone Africa. The alliance was based on competitive threats as SABMiller had purchased a piece of land in Cote d’Ivoire directly across the street from the Castel brewery. An agreement was soon reached to prevent any further encroachment.
Deutsche Securities (Pty) Ltd Page 25
4 February 2015
Beverage Beer
2. It is fiercely independent
The renewal of the strategic alliance with SABMiller in 2012 quadrupled the profit pool in Angola for Castel and gave SABMiller an encouraging hand in Nigeria. It also strengthened the pre-emption rights for SABMiller as well as recognizing the outperformance of Castel over SABMiller Africa in the previous decade. However, we don’t necessarily see the urgency of an all-or-nothing deal with the “next generation”.
Rather, Castel is seeking to strengthen its independence, which was recently apparent in the Coca Cola Beverages Africa joint venture formation as both companies confirmed discussions had taken place. We understand SABMiller would have been keen (and likely still is) for Castel to fold its Coca Cola operations into the new joint venture. However, with the involvement of three parties already (SABMiller, the Gutsche family, and Coca Cola), Castel may be one party too many. Key for SABMiller, in our opinion, would be to prove to Castel that the CCBA venture is workable and profitable.
We believe it would be difficult to convince Castel to join as it would probably have to sell its own B- brands, which form a significant part of the portfolio, symbolize its independence and strengthen its position when negotiating agreements with Coca Cola. It can be argued that with the exception of the Cola franchise, markets in Africa favor local brands in soft drinks. Outside the Coca Cola framework it also recently acquired a significant stake in Sumol + Compal, a leader in Portuguese non-alcoholic beverages with a large presence in Africa, especially Angola. Whereas SABMiller was willing to give up its own soft drinks, such as Appletizer and Club minerals, to play in the Coca Cola sandbox, we see Castel as unlikely to do so.
Castel is also more dependent on soft drinks than is SABMiller due to some of its exposure in North Africa. Given the evolution of religious fundamentalism in some of their markets, depending only on beer would be a strategic mistake. Castel is looking for smart business moves that reinforce its independence, not for somebody to retire.
3. SABMiller might seem the ‘natural choice’ and has strong rights, but others could disrupt the party
Heineken has a relationship with Castel that predates SABMiller, on both business and personal levels. It currently also owns 9% of Castel’s Brasseries du Cameroon (SABC) and licenses its brands to the company. We estimate that 20% of the current portfolio at SABC consists of Heineken brands including Amstel, Mutzig and the Heineken brand. Similar to the situation in South Africa in 2007 with the Amstel brand, should SABMiller buy Castel, Heineken could exercise its change of control clauses and immediately gain strong positions in key African markets. The relationship has become more aggressive recently with Heineken’s entry into Castel territories such as Algeria and Ethiopia.
Similarly, ABInBev has been interested in finding a way to enter Africa and has renewed its licensed agreements on Becks and Stella Artois in Algeria. And the pragmatism of Castel is very closely aligned to the Brazilian culture. Though we don’t believe that Africa is necessarily waiting for Budweiser, it would not surprise us that as part of their asset-light strategy, further agreements with ABInBev are possible.
Page 26 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
In both cases, the companies could leverage their relationship and raise the possibility of buying Castel, or (perhaps inadvertently) raise the purchase price. Though SABMiller has pre-emption rights as well as last right of refusal, a bona fide party could enter the fray to top the offer, or for that matter, provide a structure that SABMiller cannot match. In 2010, Heineken trumped SABMiller on the FEMSA deal by involving its holding structure and board seats. Heineken might want to create a similar structure once again to do a deal with Castel if the opportunity presents itself – one SAB could find hard to match.
We would assume the Castel family is not necessarily looking for money, but rather seeking to secure a legacy for future generations. SABMiller seems the natural candidate to do so. However, having a significant stake in a professionally managed family company such as Heineken, or a culturally similar company like ABInBev, might be as appealing as continuing the strong relationship with SABMiller. It keeps everybody on their toes.
Ancillary beverages businesses bring scale in small markets In the immediate future, we see the brewers leveraging their brewing platforms by entering and consolidating ancillary beverages. The most obvious candidate, in our view, is soft drinks.
In December 2014, SABMiller announced plans to merge its existing Coke bottling businesses with those of SABCO, to create a south/eastern African business operating across 12 countries. This makes SABMiller the 10th largest Coca Cola bottler worldwide and doubles down on Africa. We believe this is a good deal and likely to mark the first step in a bigger phase of deals between beer and soft drinks businesses, where we see considerable opportunities.
As we discussed in our note on December 2nd, SABMiller- Bottling the growth, we think SABMiller will probably seek to include Coca Cola operations from Castel, as above, as well other businesses, such the Nigerian operations of Coca Cola Hellenic or the attractive bits of ECCBC in West Africa.
Figure 60: Africa TCCC bottler volume share Figure 61: Estimated bottler profit split
Delta (Zimbabwe) HeinekenDelta (Zimbabwe) Others Heineken Others Penbev 2% 3% 2% 1% Penbev 3% 3% (South Africa) (South Afric) 1% 4% MAC (Egypt) 4% MAC (Egypt) CCBAfrica CCH (Nigeria) 7% 6% 40% ECCBC 7% CCBAfrica CCH (Nigeria) 48% 11%
ECCBC 10% Castel Castel 27% 20%
Source: Deutsche Bank estimates, company reports, Euromonitor Source: Deutsche Bank estimates, company reports, Euromonitor
Though we see limited benefits in combining beer and spirits, we do see further opportunity in mainstream, small packs, which tend to have high volume and a low value similar in price to beer (as opposed to the high-value, low-volume model of international premium spirits, which are priced at 5 times the level of beer). Similar to Cachaca in Brazil and Moutai in China, the entry- level spirit market in Africa appears ripe for consolidation. However, the biggest barrier is illegal production which escapes the excise net.
Deutsche Securities (Pty) Ltd Page 27
4 February 2015
Beverage Beer
Where effective legislation is in force, such as in Tanzania, a more formalized market can be developed. In that country, Tanzania Distillers - a 65%/35% joint venture between SABMiller subsidiary TBL and South Africa based Distell - have 90% market share in the spirits market built on gin-based liquors (mostly Konyagi) in small packs (sachets and 200ml bottles) and effective legislation (tax stamps on bottles effectively enforced). We see potential for more activity in spirits, with the brewers as major players, as has been seen recently in Ethiopia where SABMiller set up a new liquor company.
Diageo likely to exit beer, but not Guinness We do not believe Diageo intends to sell Guinness. Besides the emotional heritage (which is vast, though not necessarily respected in the current set-up), both the operational model and the financial benefits effectively preclude a sale.
Guinness is unique within beer, as it separates the wort production from the final product brewed in situ. Like the average home-brewing kit and the Coca Cola concentrate model, the ‘essence’ of Guinness is brewed separately. In the case of Diageo, it is brewed in Ireland and shipped to over 60 countries around the globe. Upon arrival, it is diluted 50x with a local lager stream.
The financial advantage of the model is twofold. One, like Figure 62: Nigeria EBIT performance of leading brewers the KO concentrate model, Diageo can charge whatever the market/local brewer can bear for its concentrate and 70,000 Guinness Nigeria is not beholden to transfer-pricing regulations (which (Diageo) 60,000 limit a mark-up of 12% on procured goods within Nigerian Breweries companies). In the case of Africa, this obviously puts 50,000 (Heineken) minority shareholders in listed subsidiaries such as 40,000 Guinness Nigeria and East African Breweries in Kenya at a distinct disadvantage as they don’t benefit at the same 30,000 rate of Guinness growth as Diageo would. Second, the 20,000
Irish domicile of concentrate essence production gives a (Nigerian Naira) EBIT 10,000 distinct tax advantage in the single digits to our estimate. The original tax inversion at play. 0 2010 2011 2012 2013 2014
However, we do believe Diageo is likely to eventually exit Source: Deutsche Bank, company reports. Calendarized data local operational aspects of brewing and license its brands more profitably. With the above model in mind, it already licenses production to third parties of Guinness in the majority of its markets, including Africa. Despite its distinct geographical advantage in Africa, the inheritance of one of the strongest brands in the world (the largest globally until 1940; and until the turn of the century, the largest beer brand in Africa), it has apparently mismanaged the African beer business. SABMiller and Heineken have delivered EBIT growth annually in the high teens in local currency in Africa, whereas Diageo’s performance has been flat.
We notionally value the African beer business of Diageo at $5.3 billion on a sum-of-the-parts valuation detailed in Figure 215, excluding the right to Guinness. The beer business would likely be an attractive addition to both Heineken and Castel’s portfolio, or could even be an entry point for ABInBev into Africa. Perhaps a more creative solution would be an asset swap that, for example, expands Diageo’s exposure to spirits in Africa in exchange for its beer business, where we would see SABMiller as a more likely candidate. SABMiller could potentially swap its interests in spirits businesses and license Guinness in all its operations in exchange for the Diageo beer assets in Nigeria
Page 28 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
and Kenya. SABMiller’s historical 30% ownership of Distell, the biggest spirits business in South Africa, as well as leading positions in spirits in Tanzania and Mozambique, would probably be an interesting asset for Diageo to further expand its ambitions in spirits.
Deutsche Securities (Pty) Ltd Page 29
4 February 2015
Beverage Beer
The investable universe in Africa
Africa has 20 stocks with significant beer exposure to Africa, most fairly Figure 63: Brewers of Africa illiquid. In our coverage, we favor and rate both Heineken and SABMiller for SABMiller SAB.L their exposure to Africa brewing. We see Heineken as able to deliver in Africa, Tanzania Breweries TBL.TZ complemented by its broader EM exposure and strong brand-building Zambia Breweries ZABR.LZ capability. SABMiller has unrivaled capability in Africa, but other parts of the National Breweries NATB.LZ business will likely be a drag on results in the short term. We are concerned International Breweries IB.LG about Diageo’s ability to deliver in Africa, and our Buy rating on the company Delta DLTA.ZI is despite its beer capability on the continent. Sechaba Brewery SECH.BT
For the other 17 smaller-capitalized stocks, we have provided descriptions for Diageo DGE.L completeness on pages 141 to 182, with key financials and graphs for the East African Breweries EABL.NR listed African brewers. Investing in the locally listed African subsidiaries is a Guinness Nigeria GB.LG double-edged sword. Though all of them provide immediate access to the growth of the African consumer, the lack of liquidity, questionable minority Heineken HEIN.AS rights and inability to effectively reinvest earnings locally increase the risk. Nigerian Breweries NB.LG Bralirwa BLR.RW Heineken (Buy, TP €70) Heineken is the best-exposed brewer to growth in Africa, positioned to capture Champion Breweries CB.LG a third of the growth in the next decade. Though in the short term, we are concerned about the current situation in Nigeria, the recent amalgamation of Bras.Cameroun Par BRCP.PA its breweries in that market and its focus on making beer more accessible to Soboa Par BROA.PA the broader population should mitigate those concerns. Exposure to the great Brasseries Du Maroc SBM.CS potential of the DRC and Ethiopia further enhances the company’s footprint, as Brass De Tunis SFBT.TN does being the only brewer on the continent with a real international brand. Namibia Breweries NBS.NM Outside of Africa, we believe Heineken has the best exposure in the right Phoenix Beverages PBL.MZ emerging markets, with Mexico and Asia ex-China driving growth. In its developed markets, it has a patient and proven model of investing behind its Source: Deutsche Bank brands and in innovation for the future and has set up its production model to deal with the required complexity that this entails. Heineken remains our top pick in the sector and in consumer staples.
SABMiller (Hold, TP £35; ZAR630) We estimate that SABMiller is positioned to capture 27% of the growth in Africa over the next decade. Its recent collaboration agreement to create Coca Cola Beverages Africa has potential to be transformative. With unrivaled managerial competence in the continent, it appears poised to capture more than its fair share of the growth.
However, historically, when growth has stalled in Africa, it is due to lack of investment. With the current competitive pressure in Australia, the potential commodity headwinds in Latin America, and the capital and managerial intensity required for the company’s global centralization initiatives, we are concerned that the region will not be allocated the capital required to stimulate growth.
Though we are believers in the long-term growth of SABMiller, with mid- single-digit EPS growth forecast for the immediate future and what we see as minimal likelihood of being acquired by ABInBev, we believe the stock is fairly valued and we maintain our Hold.
Page 30 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Diageo (Buy, £20) Theoretically, Diageo has some of the best exposure to beer in Africa and the strongest brand as well. However, historically, the company has been unable to tap into that attractive potential as it focuses on spirits rather than beer. We don’t rate Diageo as a beer player. As detailed in our note of December 5th, Much aDo about Must Do’s, we believe that Diageo should either fix its beer business or get out. Our Buy case is not based on beer, but rather its broader, strong position in spirits. The company looks well positioned to take advantage of consumer recovery in the US, accounting for 44% of EBIT, where we believe that spirits will benefit more than beer. Additionally, in the next 12 months, it will be cycling the destocking of its brands in Latin America and SE Asia.
Listed entities of SABMiller (pages 144to 156) SABMiller has six listed subsidiaries and one associate, Delta beverages. The Figure 64: Market capitalization of prime purpose of the listed subsidiaries is to enhance the license to trade and SAB listed Africa entities ensure good local corporate citizenship. The main shareholders in each are the local pension funds and quasi-government bodies. The average return in US$ 3,000 in 2014 was 11.6% with an average dividend yield of 4%. Its largest subsidiary 2,500 2,000 is Tanzania Breweries, which has had a somewhat technical share price run. 1,500 Following the announcement in November that the Tanzanian market will open 1,000 to international investors, the TBL share price spiked, returning 88% in local 500 - currency, 61% in US$. The share rerated upwards from18X LTM PE to 54X (mUS$) cap Market LTM PE as a result.
Listed subs of Diageo (pages 158 to 162) Source: Deutsche Bank Diageo has three listed subsidiaries in Africa, with Guinness Nigeria and East African Breweries Limited being among the most liquid stocks in Africa, north Figure 65: Market capitalization of of Johannesburg. However, as detailed earlier, we are concerned about Diageo listed African subsidiaries minority rights within those entities. The benefit of growth of the Guinness brand accrues primarily to Diageo, not to local shareholders. Additionally, local 3,000 shareholders do not benefit from international spirit growth in Nigeria and 2,500 Kenya. We would argue that they are indeed punished for it. While Diageo 2,000 owns 50.1% and 54% of EABL and Guinness Nigeria, respectively, it owns 1,500 100% of the spirits businesses, which sit on top of those listed entities. It pays 1,000
a nominal fee to use the sales force, distribution platform, and expatriate 500 Market cap (mUS$) cap Market management to drive the spirits portfolio. However, doing so hurts the high- - volume, low-value beer business as they focus on high-value, low-volume EABL.NR GB.LG premium spirits. The two don’t mix well. Source: Deutsche Bank
Listed entities of Heineken (pages 164 to 170) The most liquid stock on the continent north of Johannesburg is Nigerian Figure 66: Market capitalization of Breweries. Heineken’s other listed subsidiary, Bralirwa, basically created the Heineken listed African subsidiaries Rwandan stock exchange. It became the first listed entity when the stock 7,000 exchange opened in January 2011 and is up 284% in local currency, 231% in 6,000 US$ since that time - a CAGR TSR of 35%. The average return in US$ in 2014 5,000 was -55% with an average dividend yield of 2.2%. 4,000 3,000 2,000
1,000 Market cap (mUS$) cap Market - NB.LG HEIN.ASBLR.RW CB.LG
Source: Deutsche Bank
Deutsche Securities (Pty) Ltd Page 31
4 February 2015
Beverage Beer
Rating Company Tristan Van Strien Research Analyst Buy Heineken (+44) 20 754-77654 [email protected] Europe
Netherlands Price at 03 Feb 2015 66.93 (EUR) Price Target (EUR) 70.00 Consumer Staples 52-week range (EUR) 60.75 - 44.96 Beverage Reuters Bloomberg Finance LP Price/price relative HEIN.AS HEIA NA 70
60 An African Star 50 40
30 Best-positioned growth company in beer in Africa 10/11 4/12 10/12 4/13 10/13 4/14 We consider Heineken the best brewer with exposure to growth in Africa, well Heineken DJ (.STOXXE) (Rebased) placed to capture a third of the growth in the next decade. Heineken delivered Performance (%) 1m 3m 12m 9% CAGR volume growth in sub-Saharan Africa over the last decade, and we Absolute -8.7 1.2 6.8 expect the same trend to continue organically in the next decade. For Heineken, growth in Africa represents greater potential upside for the group DJ (.STOXXE) -10.6 -10.8 -5.0 Source: Deutsche Bank overall than for any other company in our coverage, potentially adding an additional third to its current EBIT. Stock & option liquidity data Nigeria and more Market cap (EUR)(m) 31,680.1 Though in the short term, we are concerned about the current situation in Shares outstanding (m) 577 Nigeria, the recent amalgamation of Heineken’s breweries in that market and Free float (%) 51 its focus on making beer more accessible to the broader population should Option volume (und. shrs., 1M 119,932 avg.) mitigate those concerns. Further exposure to the attractive potential of the Source: Deutsche Bank DRC and Ethiopia also enhances the footprint, as does being the only brewer on the continent with a real international brand. A balanced global growth profile in EM and DM Outside of Africa, Heineken has the best exposure in what we believe are the right emerging markets, with Mexico and Asia ex-China driving growth. In its developed markets, it has a patient and proven model of investing behind its brands and in innovation for the future and has set up its production model and cost base to deal with the required complexity that this entails. Top pick in 2015, TP €70 On January 12th, we updated our TP from €65 to €70. We base our price target on a DCF-model, the core assumptions behind which are a WACC of 7.83% and a terminal growth rate of 2.0%. Our downside risks include consumer sentiment in developed markets, emerging market volatility in Asia and Africa, currency risk, and competitive dynamics in Mexico and Europe.
Forecasts and ratios Year End Dec 31 2012A 2013A 2014E 2015E 2016E EBITDA (EURm) 3,784 4,193 4,328 4,498 4,850 EBITA (EURm) 2,666 2,941 3,092 3,309 3,586 PBT DB (EURm) 2,178 2,341 2,585 2,864 3,195 DB EPS (EUR) 2.88 2.75 3.07 3.34 3.73 DB EPS growth (%) 6.7 -4.6 11.5 8.9 11.5 P/E (DB EPS) (x) 14.9 19.2 17.9 16.5 14.8 EV/EBITA (x) 14.3 14.4 13.8 12.6 11.3 DPS (EUR) 0.89 0.89 0.99 1.08 1.20 Yield (%) 2.1 1.7 1.8 2.0 2.2 Source: Deutsche Bank estimates, company data
Page 32 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Model updated:12 January 2015 Fiscal year end 31-Dec 2011 2012 2013 2014E 2015E 2016E
Running the numbers Financial Summary Europe DB EPS (EUR) 2.70 2.88 2.75 3.06 3.29 3.67 Reported EPS (EUR) 2.44 5.06 2.37 2.45 2.69 3.07 Netherlands DPS (EUR) 0.83 0.89 0.89 0.99 1.07 1.19 BVPS (EUR) 17.0 20.4 19.8 21.4 23.0 25.0 Beverage Weighted average shares (m) 585 575 575 576 576 576 Heineken Average market cap (EURm) 21,854 24,666 30,368 38,552 38,552 38,552 Enterprise value (EURm) 28,218 38,182 42,512 49,759 48,715 47,478 Reuters: HEIN.AS Bloomberg: HEIA NA Valuation Metrics P/E (DB) (x) 13.8 14.9 19.2 21.9 20.3 18.2 Buy P/E (Reported) (x) 15.3 8.5 22.3 27.3 24.9 21.8 Price (3 Feb 15) EUR 66.93 P/BV (x) 2.11 2.48 2.48 3.13 2.91 2.68
Target Price EUR 70.00 FCF Yield (%) 9.1 5.6 4.4 3.9 4.4 5.0 Dividend Yield (%) 2.2 2.1 1.7 1.5 1.6 1.8 52 Week range EUR 45.19 - 66.93 EV/Sales (x) 1.6 2.1 2.2 2.6 2.4 2.2 Market Cap (m) EURm 38,552 EV/EBITDA (x) 8.2 10.1 10.1 11.5 11.0 9.9 EV/EBIT (x) 12.3 15.5 16.3 18.0 16.6 14.8 USDm 43,727 Income Statement (EURm) Company Profile Sales revenue 17,123 18,383 19,203 19,173 20,070 21,166 Heineken is a leading international brewer, with significant Gross profit 6,924 7,269 7,881 8,146 8,514 9,080 positions in Western and C&E Europe, Mexico, Africa and EBITDA 3,455 3,784 4,193 4,323 4,447 4,796 Asia. We estimate that emerging markets now account for Depreciation 936 1,062 1,089 1,176 1,101 1,161 approaching 60% of Heineken's earnings, with the Amortisation 232 254 492 389 403 417 remainder coming largely from Western Europe and the EBIT 2,287 2,468 2,612 2,758 2,943 3,217 US. The company's key brand asset is Heineken itself, the Net interest income(expense) -438 -489 -532 -446 -395 -342 most global beer brand, supported by Sol, Tiger, Associates/affiliates 240 213 146 159 170 187 Desperados, Amstel, Strongbow cider, and a range of Exceptionals/extraordinaries -58 1,229 -58 -150 -150 -150 regional and local brands. Other pre-tax income/(expense) -6 168 -61 -61 -50 -50 Profit before tax 1,785 3,376 1,961 2,101 2,348 2,675 Price Performance Income tax expense 465 515 520 621 719 817 Minorities 130 160 223 227 249 276 70 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 1,430 2,914 1,364 1,413 1,550 1,769 60 DB adjustments (including dilution) 154 -1,253 221 352 350 350 50 DB Net profit 1,584 1,661 1,585 1,764 1,900 2,119 40 Cash Flow (EURm) 30 Cash flow from operations 2,751 2,492 2,627 3,037 3,122 3,438 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Net Capex -755 -1,117 -1,294 -1,528 -1,436 -1,516 Heineken DJ (.STOXXE) (Rebased) Free cash flow 1,996 1,375 1,333 1,509 1,685 1,921 Equity raised/(bought back) -649 3 -22 0 0 0 Margin Trends Dividends paid -483 -494 -525 -512 -591 -635 Net inc/(dec) in borrowings 195 3,909 -811 -997 -1,094 -1,287 24 Other investing/financing cash flows -931 -4,553 291 0 0 0 22 Net cash flow 128 240 266 0 0 0 20 Change in working capital 251 101 51 13 25 41 18 16 Balance Sheet (EURm) 14 Cash and other liquid assets 813 1,037 1,290 1,290 1,290 1,290 12 Tangible fixed assets 7,860 8,844 8,454 8,726 8,978 9,246 11 12 13 14E 15E 16E Goodwill/intangible assets 10,835 17,688 15,934 15,625 15,305 14,974 EBITDA Margin EBIT Margin Associates/investments 3,363 3,728 3,212 3,210 3,207 3,205
Other assets 4,256 4,683 4,447 4,592 4,787 5,047 Growth & Profitability Total assets 27,127 35,980 33,337 33,443 33,568 33,763 Interest bearing debt 9,387 13,491 12,226 11,229 10,135 8,848 8 30 Other liabilities 7,648 9,684 8,755 8,900 9,098 9,376 6 25 Total liabilities 17,035 23,175 20,981 20,129 19,233 18,224 20 4 Shareholders' equity 9,774 11,734 11,402 12,303 13,262 14,396 15 Minorities 318 1,071 954 1,011 1,073 1,142 2 10 Total shareholders' equity 10,092 12,805 12,356 13,313 14,335 15,538 0 5 Net debt 8,574 12,454 10,936 9,939 8,845 7,558 -2 0 11 12 13 14E 15E 16E Key Company Metrics Sales growth (%) 6.1 7.4 4.5 -0.2 4.7 5.5 Sales growth (LHS) ROE (RHS)
DB EPS growth (%) 4.5 6.7 -4.6 11.1 7.7 11.5 Solvency EBITDA Margin (%) 20.2 20.6 21.8 22.5 22.2 22.7 EBIT Margin (%) 13.4 13.4 13.6 14.4 14.7 15.2 120 10 Payout ratio (%) 34.0 17.6 37.5 40.4 39.8 38.7 100 8 ROE (%) 14.3 27.1 11.8 11.9 12.1 12.8 80 Capex/sales (%) 5.0 6.8 7.5 8.2 7.4 7.4 6 60 Capex/depreciation (x) 0.9 1.1 1.2 1.3 1.3 1.3 4 40 Net debt/equity (%) 85.0 97.3 88.5 74.7 61.7 48.6 20 2 Net interest cover (x) 5.2 5.0 4.9 6.2 7.5 9.4
0 0 Source: Company data, Deutsche Bank estimates 11 12 13 14E 15E 16E
Net debt/equity (LHS) Net interest cover (RHS)
Tristan Van Strien +44 20 754-77654 [email protected]
Deutsche Securities (Pty) Ltd Page 33
4 February 2015
Beverage Beer
Heineken
We believe Heineken is the best brewer with exposure to growth in Africa, well positioned to capture a third of the growth in the next decade. Though in the short term, we are concerned about the current situation in Nigeria, the recent amalgamation of its breweries in that market and its focus on making beer more accessible to the broader population should mitigate those concerns. Further exposure to the attractive potential of the DRC and Ethiopia also enhances Heineken’s footprint, as does being the only brewer on the continent with a real international brand.
Outside of Africa, Heineken has the best exposure in what we consider the right emerging markets, with Mexico and Asia ex-China driving growth. In its developed markets, it has a patient and proven model of investing behind its brands and in innovation for the future and has set up its production model to deal with the required complexity that this entails. Heineken remains our top pick in the sector and in consumer staples.
An African Star
Areas of growth, African markets Heineken delivered 9% CAGR volume growth in sub-Saharan Africa over the Figure 67: Heineken 2015DBe Africa last decade. Some of this is inorganic, but we expect the same trend to volume split (sub Sahara) continue organically in the next decade. In addition to its leadership position in Angola Other Ghana* 2% 4% Nigeria, the DR Congo, Ethiopia, Rwanda and Burundi should be sizable Ethiopia 3% 4% contributors. Namibia* 4% Rwanda 5% Figure 68: Heineken Africa growth Nigeria Burundi 45% 6% 80,000 73m hl Congo, Rep. 7% 70,000 Congo, Dem. Rep. 10% South Africa 60,000 9% CAGR 10% Ethiopia 50,000 Burundi Rwanda Source: Deutsche Bank estimates, Plato logic, company reports
40,000 DR Congo 9% CAGR 31 mhl 30,000 Volume (Hl (Hl Volume'000) 5% CAGR 20,000 14 mhl 8mhl Nigeria 10,000
- 1995vol 2005vol 2015vol 2025 vol
Source: Deutsche Bank estimates, Plato Logic, company reports
Page 34 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Relevance to group growth For Heineken, growth in Africa represents greater upside potential for the group overall than for any other company in our coverage and should add 25% to its current EBIT.
Figure 69: Africa share of African EBIT Figure 70: Additional Africa EBIT to group EBIT by 2025
Africa ME 30% W Europe 22% 26% 25%
20%
15% C Europe
8% 10% 2015DBe EBIT2015DBe Americas 26% 5%
AsiaPac on EBITglobalgrowth Africa 18% 0% Heineken SABMiller Diageo
Source: Deutsche Bank, company reports Source: Deutsche Bank estimates, company reports
The region currently comprises 22% of group EBIT. By FY17, we expect its contribution to exceed that of Western Europe and by FY19 that of all of Europe.
Track record of growth in Africa The Africa / Middle East region has consistently delivered results for Heineken. Only two of the last 20 quarters have not seen volume growth. Average like- for-like EBIT growth in Euros has been 9% over the same period.
Figure 71: Heineken AME quarterly volume growth Figure 72: Heineken AME LFL reported revenue & EBIT
14.0% 25.0% 12.0% 20.0% 10.0%
8.0% 15.0%
6.0% 10.0% 4.0% 5.0% 2.0%
0.0% growth LFL Heineken 0.0% LFL volume growth AME in growth volume LFL H1 10 H2 10 H1 11 H2 11 H1 12 H2 12 H1 13 H2 13 H1 14 H2 14E -2.0% -5.0% -4.0%
-6.0% -10.0%
Heineken EBITA Reported revenue
Source: Deutsche Bank, company reports Source: Deutsche Bank, company reports
Deutsche Securities (Pty) Ltd Page 35
4 February 2015
Beverage Beer
And a track record of investment To support its growth, the company has invested ahead of demand, with almost €2.5bn in capital investment over the past five years.
Figure 73: Heineken Capex investment into Africa
600 25%
500
20% Capex/AME Revenue 400
15% millions
€ 300
10%
Capex Capex 200
5% 100
0 0% 2007 2008 2009 2010 2011 2012 2013
Africa Capex Capex/Revenue
Source: Deutsche Bank, company reports
In the past five years, it has also played catch-up on the M&A front, at times perhaps being seen as overpaying for some assets. Before the current CEO, conservatism held sway at Heineken, including an avoidance of Africa. During this period, the company divested its minority stakes in Angola (the Nocal and EKA brewery) to Castel. Over the following decade, Angola became the fastest- growing market in Africa. Not a good move.
To make amends, some overinvestment has been undertaken. In 2011, the company acquired five breweries from the Sona Brewery group in Nigeria, adding 3.7mhl to its footprint with a broader value portfolio of brands – partially to block SABMiller from having an entry point. Similarly, the company outbid its competitors in attaining the Harar and Bedele Breweries in Ethiopia.
Expanding and stimulating growth in Nigeria Recently, approval has been granted in Nigeria to merge Heineken’s majority- owned subsidiaries, Nigerian Breweries and Consolidated Breweries. With the latter more focused on value brands such as 33 Export, which has national brand awareness, we see this as an opportunity to stimulate growth in a market in which it holds 70% market share.
Pricing has been historically high in Nigeria, almost 40% higher than in neighboring Cameroon and above inflation over the last decade. Overall, we see both Heineken and SABMiller winning long term in a market that has yet to reach its potential.
Page 36 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 74: Nigerian Breweries EBITDA in US$ Figure 75: Nigerian breweries price mix in US$
600 34% 40%
33% 500 30% 32%
400 31% EBITDA margin 20%
30% 300 10% 29%
200 28% 0% 2005 2006 2007 2008 2009 2010 2011 2012 EBITDA (USDm) EBITDA 27% 100 -10% 26%
0 25% -20% 2011 2012 2013 Volume Implied price mix
Source: Deutsche Bank, company reports Source: Deutsche Bank estimates, Plato Logic, company reports
Ethiopia potentially the fastest-growing beer market over the next decade In 2011, Heineken acquired Harar and Bedele Breweries Ethiopia in a competitive auction, beating both SABMiller and Diageo. A new brewery in Kilinto, Addis Ababa, opened Jan 2015 and will produce 1.5 million hl. The €110mln new brewery is part of a total €310mln investment in the country by Heineken since 2011. We are excited about this market and project it to grow 11% per annum over the next decade – in line with the previous one.
Figure 76: Ethiopia volume and PPC growth
14000 18.0 Volume 15+)(pop Consumption Per Capita 12000 16.0 PPC 15+ 2015-2025DBe CAGR Volume: 11% 14.0 PCC: 6% 10000 2005-2015DBe CAGR Volume:10% 12.0 PCC: 7% 8000 1995-2005 CAGR 10.0 Volume: 7% PCC: 4% 6000 8.0 6.0 Volume ('000Hl) Volume 4000 4.0 2000 2.0 0 0.0
Source: Deutsche Bank estimates, Plato Logic, World Bank
Will the partnerships with Diageo continue? For Africa, Ghana is historically unusual as it is one of the few markets with European-style competition. Like Eastern Europe today, three well-funded players in the form of Diageo, Heineken, and SABMiller are dilutive for profitability in the market.
In 2004, Diageo and Heineken created a joint venture, with Diageo taking control, owning 52.4%, and Heineken owning 20%. Heineken left the country and Diageo was left with the venture, which ended up with a 72% market share. Again, not a good move on Heineken’s part.
Deutsche Securities (Pty) Ltd Page 37
4 February 2015
Beverage Beer
The operational performance is reflected in the share trends. SABMiller, from a very weak position at 28% market share, today has almost equalized and caught up. The biggest share donor has been Star – the Heineken brand that has now been eclipsed by Club lager as the largest brand in the market.
Figure 77: Ghana market share progression Figure 78: Ghana joint venture profitability
80% market share at its peak 72% 45 25.0% when DGE took over... EBIT (operating profit) 70% Diageo & Heineken 40 merge operations end EBIT margin 60% 2004; DGE manages the 35 20.0% new JV Club Lager of ABL 53% 50% takes share from 30 EBITmargin market leader Star 15.0% 40% ..and losing 25 leadership after a 30% decade of 20
Beer market share market Beer management by DGE 10.0%
20% 15 EBIT (GHS millions) (GHS EBIT 10% 10 5.0%
0% 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 0.0% Guinness Ghana GBL (Heineken) ABL (SABMiller) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Deutsche Bank estimates, Plato Logic, company reports Source: Deutsche Bank, company reports
The financial performance in Ghana has followed the market share trend. EBIT margin peaked on the back of synergies in 2007 at 20%. In the past year, it hit 2%. It appears some one-offs are at play (mostly due to the devaluation of the Ghanaian Cedis increasing input costs), but this margin has hovered around 10%. In real US$ terms, for a business that made US$21m in 2007, we would say that seeing no growth cannot be acceptable. However, we believe that for SABMiller, Ghana is now becoming a significant contributor.
A similar situation may unfold in South Africa. In March 2008, the Brandhouse JV in South Africa incorporated Diageo, Heineken and Namibia Breweries (in which Heineken has 14.5% interest). The Brandhouse JV is 50% Diageo (spirits): 50% DHN Drinks (beer). DHN Drinks is 42.25% Diageo, 42.25% Heineken and 15.5% Namibia Breweries. It is a profit share JV. To complicate matters, the Sedibeng brewery constructed outside Johannesburg for R3.5bn is owned 75% by Heineken and 25% Diageo.
Figure 79: Brandhouse South Africa structure
Brands Supply Distribution
Diageo 42.25% DHN Drinks (Pty) Ltd Diageo 25% Supply Company Diageo 50% Brandhouse (Pty) Ltd Heineken 42.25% Distribution profit JV Heineken 75% Local production JV DHN Drinks 50% Cost sharing NBL 15.50% Beer, RTD, cider Beer, RTD, cider Distribution JV
Diageo 100% Diageo SA (Pty) Ltd Diageo 100% Diageo SA (Pty) Ltd Distribution profits RTD, cider Spirits Local production
Heineken 100% Heineken Amstel, Heineken Production for import
NBL 100% Namibia Breweries Ltd NBL brands, Heineken Production for import
Source: Deutsche Bank, company reports
Page 38 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
In South Africa Diageo’s strategy is to build higher-margin spirits business on beer. Furthermore, the shared investment in the Sedibeng brewery has allowed for capacity to also invest more in RTM development.
A key decision point in future will be once critical mass in volumes has been achieved for each of the JV partners. DHN Drinks continues to report financial losses. In the 12 months to June 2014, DHN Drinks reported a loss before tax of ZAR798m on revenues of ZAR4,552m. On formation of the JV in May 2008, Brandhouse projected economic breakeven in year three (FY2012), which did not materialize.
Figure 80: DHN Drinks South Africa still unprofitable 5,000
4,000
3,000
2,000
ZAR m ZAR 1,000
0 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
-1,000
-2,000 FY to June Net revenue Loss before tax
Source: Deutsche Bank, company reports
Both Windhoek of Namibian Breweries and Heineken are now >1mhl brands, and Amstel continues to recover. Diageo believes that DHN Drinks can do more with both the Guinness and Heineken brands, but the investment required to achieve this will have to be carried by all three partners, not just the two brand owners. This situation may contribute to the JV agreement not being renewed in 2017.
Deutsche Securities (Pty) Ltd Page 39
4 February 2015
Beverage Beer
The strongest growth platform in beer
Strong inherent growth Heineken has one of the strongest and most balanced embedded volume growth profiles in beer. Based on population growth in the right age cohort and per capita potential, we estimate a 10-year volume CAGR of 4%
Figure 81: Heineken long-term embedded volume growth potential
current pcc growth 2025 pop growth 2050 pop growth
450 4% 10 year embedded volume CAGR to 2025 400 350 300
250 9% 200
million hL million 150 2% 100 7% 0% -0% 50 - -50 Total Africa & Asia Pacific Americas Western Central & Middle East Europe Eastern Europe
10 Year CAGR assumes adjusted state per capita consumption growth to potential on 2015DBe volume. 35 year CAGR assumes full per capita consumption potential on 2014DBe volume. Source: Deutsche Bank estimates, World Bank Plato Logic, company reports
A changed platform demonstrating stronger growth Over the past 7 years, Heineken has significantly adjusted its profile. In 2007, 2/3rds of its EBIT (beia) came from Europe. For FY15, we expect this to be under 40% of EBIT (beia) and to be less in years ahead as Africa, Mexico and Asia drive growth.
Figure 82: Heineken divisional EBIT (beia) contribution
100% 4% 5% 90% 14% 18% 18% 23% 80% 19% 70% 26% 26% AsiaPac 60% 22% Americas 50% 25% Africa ME 15% 22% 40% 29% C Europe W Europe 30% 7% 6% 20% 39% 36% 26% 10% 22%
0% FY 07 FY 10 FY 15E FY 19E
Source: Deutsche Bank estimates, company reports
Page 40 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
With the European markets inherently ex-growth, stabilized performance in the region will likely drive investor sentiment to focus on what we believe is a superior growth profile.
Fastest-growing regions drive positive margin mix For Heineken, its fastest-growing markets are also the most margin-enhancing.
Figure 83: 2015-2017DBe revenue growth rates on 2015 DBe base year
16%
14% Africa ME
12%
10%
8% AsiaPac Americas 6%
4%
18 Dbe annualDbe 18 revenue average - 2% W Europe 2016 C Europe 0% 0% 5% 10% 15% 20% 25% 30%
2015DBe EBIT margin
Source: Deutsche Bank estimate, company reports
In the short term, we do not expect great margin expansion in Africa and Asia Pacific as the company – rightfully, in our view – focuses on a broader portfolio with Tiger and local brands in Asia and 33 Export and Goldberg in Nigeria.
The patience to invest behind growth brands Historically, the mainstream portfolio has acted as a strategic underpinning to enhance the long-term ambitions of the Heineken brand. The Heineken brand has succeeded in outpacing organic beer growth in every set of half-year results since 2004. Conversely, it could be said that the local portfolios underperformed, leading to overall mediocre performance for the company.
Since being appointed in 2010, the Heineken CMO and now head of Western Europe has significantly shifted the focus and extended the BWP (Building Winning Portfolios) initiative, shifting the mindset of the company. Like an oil tanker, the company has slowly come around. Its global brand-building skills have been more visibly applied to a broader global premium portfolio and regional premium brands.
Deutsche Securities (Pty) Ltd Page 41
4 February 2015
Beverage Beer
Figure 84: Heineken regional brand growth Figure 85: Long-term pull: Heineken brand-building
6000 1000 South Africa 1992 900 Desperados Taiwan 1991 5000 Dos Equis 800 Chile 1993 Tiger 700 4000 New Zealand 1994 Primus 600 Nigeria 1998 500 3000 Algeria 2001
'000 hl '000 400 Romania 2003
Volumes ('000 ('000 VolumeshL) 300 2000 200
1000 100 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Years post launch*
Source: Deutsche Bank estimates, company reports, Plato Logic Source: Deutsche Bank, company reports, Euromonitor, Plato Logic
Each region has established a broader premium portfolio. Originally established in 1932 in Singapore as a compromise with Fraser & Neave (to prevent their partner to compromise the Heineken brand), Tiger Beer is now fully managed by Heineken and complementing its Asian growth as a pan- regional brand. With a 33% CAGR over the last three years, part of the growth focus is to ensure that the gap between Heineken and mainstream remains, especially in markets such as Vietnam.
Dos Equis and Tecata in North America have maintained and even improved Heineken has extended its their momentum since entering the Heineken portfolio, with Dos Equis brand-building skills to a generating the most interesting growth of 12% CAGR since 2010. broader premium portfolio
Desperados and Affligem drive pan-regional growth in Europe, and Primus and Star in Africa complement the drive for Heineken. In the global portfolio, Strongbow has the opportunity to be the world leader in the fast-growing cider category. Sol has recently been re-launched with healthy brand equity scores, and Amstel continues to be an accessible premium category developer.
The broader focus on driving more scalable, premium portfolios should help Heineken better leverage its operational and marketing capabilities.
Page 42 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Valuation and key graphs
Valuation gap not reflective of embedded growth Considering its embedded growth profile, we also believe that the discount implied by the relative valuation to SABMiller and ABInBev is excessive. Currently Heineken trades at 6.1% and 12.4% discounts to the two brewers, respectively, and at a 7.7% discount to our broader consumer staples universe. With an EV/EBITDA ratio additionally significantly below those of ABI and SABMiller, we believe shrinkage to the discount is warranted.
We base our €70 price target on a discounted cash flow model. For all our brewers and spirits companies, we have assumed a risk free rate of 4.0% and an equity premium of 4.3%. For Heineken, the resultant WACC is 7.83%, which incorporates a levered beta of 1.18, and net debt / EV ratio of 20%. Our medium-term cash flow models growth of 5% a year, and a post year-10 terminal growth rate of 2.0%. We view our terminal growth rate of 2% as conservative, below the embedded volume growth rate.
Figure 86: TP sensitivity for terminal growth and WACC changes TP per Share (€) WACC Terminal Growth Rate 7.07% 7.32% 7.57% 7.82% 8.07% 8.32% 8.57% 2.75% 96.98 90.79 85.29 80.37 75.95 71.96 68.34 2.50% 92.09 86.45 81.42 76.89 72.80 69.10 65.73 2.25% 87.67 82.51 77.87 73.69 69.89 66.44 63.30 2.00% 83.65 78.90 74.61 70.73 67.20 63.97 61.02 1.75% 79.97 75.58 71.60 67.99 64.68 61.66 58.89 1.50% 76.60 72.52 68.82 65.43 62.34 59.50 56.88 1.25% 73.48 69.69 66.22 63.05 60.14 57.47 55.00 Source: Deutsche Bank
Risks to our valuation Key downside risks include the economic environment in Europe, competitor activity in key markets (Europe plus the Americas, Africa and Asia), and volatility in input costs and currency. Additional potential risk factors include overpayment for an acquisition target and the fact that institutional shareholders remain in a minority position.
Deutsche Securities (Pty) Ltd Page 43
4 February 2015
Beverage Beer
Figure 87: Heineken earnings index relative to Brewers index (US$)
1.8 Similar to SABMiller, with its increasing 1.7 exposure to emerging markets Heineken has 1.6 been underperforming the brewer earnings index in US$. In recent years a weaker Euro 1.5 exchange rate contributed as well. 1.4 Note that the FEMSA acquisition in 2010 1.3 resulted in the temporary earnings jump. 1.2 1.1 1 0.9
0.8
06 07 08 09 10 11 12 13 14
13 07 08 09 10 11 12 14
14 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 15
------
------
------
Jul Jul Jul Jul Jul Jul Jul Jul
Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct
Jan Jan Jan Jan Jan Jan Jan Jan Jan
Brewer peer group, market capitalisation weighted: ABI, SABMiller, Carlsberg, Molson Coors and Anadolu Efes Source: Deutsche Bank, Datastream
Figure 88: Heineken NTM rolling PE Figure 89: Heineken NTM PE relative to global peer group Current = 18.7x 24 Mean = 15.8x 1.5 Current = 0.93x +1 SD = 19.0x Mean = 1.01x 22 +2 SD = 22.2x 1.4 +1 SD = 1.18x
20 1.3
18 1.2
16 1.1 1.0 14 0.9 12 0.8 10 0.7
8
Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun
Dec 05 Dec 12 Dec Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 13 Dec 14 Dec
Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun
Dec 00 Dec 08 Dec Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec
Heineken 12 month forward PE Mean +1 Standard deviation band +2 Standard deviation band 12 month forward PE of Heineken relative to global brewers (excl Heineken) Mean Standard deviation band
Source: Deutsche Bank, Datastream Peer group, market capitalisation weighted: ABI, SABMiller, Carlsberg, Molson Coors and Anadolu Efes Source: Deutsche Bank, Datastream
Figure 90: Volume 2015E Figure 91: Revenue 2015E Figure 92: EBIT (beia) 2015E Africa ME Africa ME Africa ME W Europe 15% 14% W Europe 22% 24% 26% W Europe 37%
Americas Americas 24% C Europe 29% 8% C Europe Americas 22% 26% C Europe AsiaPac AsiaPac AsiaPac 18% 10% 13% 12%
Source: Deutsche Bank estimates Source: Deutsche Bank estimates Source: Deutsche Bank estimates
Page 44 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 93: Heineken 1yr fwd P/E Figure 94: Heineken consensus EPS revision
40 4.5
35 4.0
30 3.5
25 3.0
20 2.5
15 2.0
10 1.5 5 1.0
0
99 00 01 04 05 06 07 11 12 13 14 02 03 08 09 10 15
01 02 03 04 07 08 09 10 14 99 00 05 06 11 12 13
------
------
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul
Jul 2006 2007 2008 2009 2010 2011
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 Source: Deutsche Bank, Datastream Source: Deutsche Bank, Datastream
Figure 95: Heineken revenue growth vs EBIT margin Figure 96: Organic growth by division 2015-17 CAGR
16% 16% 14% Africa ME 14%
12% 12% 10.1% 10% 10% 8% 8% AsiaPac Americas 6% 6% 4%
4% 18 Dbe annualDbe 18 revenue average
- 2% 2% W Europe 0% 2016 C Europe 0% -2% 0% 5% 10% 15% 20% 25% 30% Heineken Africa ME Americas AsiaPac C Europe W Europe
2015DBe EBIT margin Volume Revenue EBIT EPS
Source: Deutsche Bank estimates Source: Deutsche Bank estimates
Figure 97: Brewer 2015DBe EV/EBITDA Figure 98: Heineken forward P/E relation to staples
16.0 1.2
14.0 1.1
12.0 1.0
10.0 0.9
8.0 0.8
6.0 0.7 Heineken 4.0 Staples basket 0.6 2.0
0.5
08 09 13 14 05 06 07 10 11 12 15
05 06 07 09 10 11 14 08 12 13
------
------
0.0 -
Jul Jul Jul Jul Jul Jul Jul Jul Jul
Carlsberg Heineken Average SABMiller AB InBev Molson Coors Jul
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
Source: Deutsche Bank, Bloomberg Finance LP estimate for Molson Coors Consumer staples index based on a weighted average of 34 companies Source: Deutsche Bank, Datastream
Deutsche Securities (Pty) Ltd Page 45
4 February 2015
Beverage Beer
Rating Company Wynand Van Zyl Research Analyst Hold SABMiller (+27) 11 775-7185 [email protected] Europe
United Kingdom Price at 2 Feb 2015 (ZAR) 626.00
Price Target (ZAR) 630.00 Consumer Staples Reuters Bloomberg Finance LP 52-week range (ZAR) 668.91 - 484.00
Beverage SABJ.J SAB SJ Price/price relative
700 600 An African Eagle 500 400 300 An African Eagle ready to soar 200 SABMiller has one of Africa’s strongest platforms in beer, with superior 2/12 8/12 2/13 8/13 2/14 8/14 SABMiller management competence to fulfill its potential. The recent integration of the FTSE/JSE ALL SHARE (Rebased)
Africa & South Africa businesses should bring further benefits as strong Performance (%) 1m 3m 12m resources are deployed to growth areas. The recent Coca Cola Beverages joint Absolute 4.5 0.8 25.5 venture provides an additional platform for growth. The company has more FTSE/JSE ALL 3.8 3.4 13.9 optionality on Coca Cola M&A on the continent and long term could do more SHARE deals with family group Castel. We also see some potential bright sparks in Source: Deutsche Bank
South Africa, and a reinvigorated innovation pipeline could bring unexpected Stock data upside in the market Market cap (ZAR)(m) 998,876.5 Shares outstanding (m) 1,618 The other 2/3rds a concern Free float (%) 59 The other markets that matter – Australia and Colombia – are facing significant FTSE/JSE ALL SHARE 51,394.6 slowdowns and continue to be a material drag on group performance. Further Source: Deutsche Bank investments in centralization take both time and financial resources, potentially inhibiting growth. Key indicators (FY1) ROE (%) 13.0 The unnecessary put option ROA (%) 6.8 Having been widely perceived as an acquisition target since the 1990’s, we Net debt/equity (%) 36.4 see the put option that is part of the SABMiller share price as unnecessary. We Book value/share (USD) 18.6 do not see ABInBev buying SABMiller and believe it has better options. Price/book (x) 2.9 Net interest cover (x) 7.1 Fairly valued; maintain TP of £35/ZAR630 and Hold EBIT margin (%) 26.5 We base our 12-month £35.00/ZAR630.00 target price on DCF valuation Source: Deutsche Bank (including WACC 7.89%, LTR 2.0%). Risks include EM FX developments, consumer sentiment in Latin America and Africa, government taxation, centralization of the organization and M&A.
Forecasts and ratios Year End Mar 31 2013A 2014A 2015E 2016E 2017E EBITDA (USDm) 5,709 5,720 5,711 5,828 6,269 EBITA (USDm) 4,786 4,800 4,763 4,852 5,264 PBT DB (USDm) 4,057 4,035 4,140 4,450 4,937 DB EPS (USD) 2.34 2.39 2.43 2.56 2.78 DB EPS growth (%) 10.3 2.0 1.6 5.5 8.3 P/E (DB EPS) (x) 18.8 20.8 22.4 21.2 19.6 EV/EBITA (x) 14.3 15.4 16.3 15.7 14.2 DPS (USD) 1.01 1.05 1.07 1.13 1.22 Yield (%) 2.3 2.1 2.0 2.1 2.2 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
Page 46 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Deutsche Securities (Pty) Ltd Page 47
4 February 2015
Beverage Beer
SABMiller
We believe SABMiller is positioned to capture directly a quarter of the growth in Africa over the next decade and another quarter through its associate Castel. The recent collaboration agreement to create Coca Cola Beverages Africa holds potential to be transformative. With unrivaled managerial competence on the continent, it appears poised to capture more than its fair share of the growth.
However, historically, when growth has stalled in Africa, it is due to lack of investment. With the competitive current pressure in Australia, the potential commodity headwinds in Latin America, and the capital and managerial intensity required for its global centralization initiatives, we are concerned that the region will not be allocated the capital required to stimulate growth.
Though we are believers in the long-term growth of SABMiller, with a mid- single-digit EPS growth profile in the immediate future and no apparent likelihood of an ABInBev bid (we see an essentially negligible chance), we believe the stock is fairly valued and we maintain our Hold.
An African Eagle
An African Eagle SABMiller was born and bred in Africa, with its expansion north of the Limpopo River accelerating after the end of Apartheid. Its strong platform of fully managed subsidiaries appears positioned to capture 27% of the anticipated growth in Africa over the next decade.
Figure 99: SABMiller Africa lager growth
90,000 82m hl 80,000 6% CAGR 12% ex SA 70,000
60,000 Nigeria 3% CAGR Moz 50,000 8% ex SA 44m hl 2% CAGR Uganda 40,000 3% ex SA 33m hl Tanzania
30,000 27m hl Volumes (Hl (Hl Volumes'000) 20,000 SA 10,000
- 1995vol 2005vol 2015vol 2025 vol
Source: Deutsche Bank estimates, Plato Logic, World Bank
Including its South African business, the newly formed Africa division should grow volumes 6% per annum. Excluding the relatively mature South Africa business, which currently makes up 64% of the volume, the rest of Africa should grow 12% and be almost 2x the size of South Africa by 2025.
Page 48 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Portfolio effect in Africa bringing consistent growth The key advantage SABMiller has in Africa is the portfolio effect of multiple Figure 100: SABMiller subsidiary countries. The diversification offered by operating in a total of 39 countries (14 volume split country subsidiaries, 25 for associates including those of Castel) offers a relatively smooth ride in terms of performance at the group level. Over the past Tanzania Nigeria decades, all markets have had positive CAGR growth and an unweighted 7% 7% Mozambique Uganda5% 5% Ghana average volume growth rate of 6% since 1995. Zimbabwe* 2% Zambia3% Botswana 3% 1% Other South Sudan 6% Figure 101: Volume growth in SAB Africa markets (1995 = index 100) 1% Lesotho Namibia1% 1% 600 Swaziland South Africa 0% 64%
500 Source: Deutsche Bank estimates, company reports 400
300
200
100
0
Note: Angola, Uganda and South. Sudan exceed 600% volume growth. Source: Deutsche Bank estimates, Plato logic
The portfolio effect has been seen in action over the last five years. Every quarter bar one has seen positive volume growth. Every quarter has an issue – Mozambican floods, excise tax increases in Tanzania, port delays in Angola, or something else. Yet the diversification of markets allows the impact to be smoothed.
Figure 102: Africa SABMiller LFL volume growth Figure 103: Africa SABMiller LFL revenue & EBIT growth
20.0% 30% 18.0% 25% 16.0%
14.0% 20% 12.0% 15% 10.0%
8.0% 10% 6.0% 5% LFL volume AME grow volume in th LFL 4.0%
2.0% grow Africa LFL th SABMiller 0% 0.0% -5% H110 H210 H111 H211 H112 H212 H113 H213 H114 H214 H115
Lager LFL Grow th EBITA Reported revenue
Source: Deutsche Bank, company reports. Excludes South Africa Source: Deutsche Bank, Company data. Excludes South Africa
Deutsche Securities (Pty) Ltd Page 49
4 February 2015
Beverage Beer
Nigerian entry to stimulate market growth SABMiller’s entry into Nigeria in 2008 capped a 15-year process of finding an entry point. The country has 79 registered breweries, many of them built before 1990, and fewer than 20 operational. After losing to Heineken in attempting to acquire Sono Breweries, SABMiller took the plunge by purchasing Pabod Brewery in Port Hartcourt. Not a place for the faint hearted, but for many SABMiller expats who previously were stationed in Angola, everything is relative.
With the Pabod brewery barely holding together, SABMiller subsequently built a new plant in Onitsha and added the listed International Breweries to its portfolio as part of the renewal of the Castel strategic alliance.
Given the established presence of the two international brewers SABMiller’s entry strategy in 2008 was centered around mainstream and economy brands and in regions outside of the major beer markets. Though notionally priced 30% below the mainstream Star, on a relative Africa basis, beer is expensive in Nigeria. With Heineken holding almost 70% share and Guinness at almost 20%, the duopoly has used its position to establish a pricing umbrella that provided SABMiller an opportunity to enter. Over the last decade, pricing has been above inflation (Figure 104), which has resulted in a price to consumer roughly 40% above the African norm and Cameroon next door (Figure 105).
Figure 104: Nigeria pricing relative to inflation 2003-2012 Figure 105: Nigeria pricing and margins
140 $250 30% Guinness Nigeria Pricing
25% 130 Heineken Nigerian $200 Breweries Pricing Inflation 20% 120 $150 15% 110 $100
10%
2003 index= 100 index= 2003 Net Revenue per Hl (US$) Hl per Revenue Net
100 $50 revenue net on margin EBIT 5%
90 $0 0% Africa average Nigerian breweries Guinness Nigeria 2012 2012 80 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net revenue/Hl (left axis) EBIT Margin (right axis)
Pricing and inflations equalized on US$ basis Source: Deutsche Bank estimates, company reports Source: Deutsche Bank estimates, companies reports, Plato Logic
The success of this entry strategy, where its market share (SABMiller plus that of Castel) has since increased from around 3% to c.10% is testament to the opportunity presented by this white space. It helps that Diageo’s Harp Lager has been the primary share donor.
We don’t see SABMiller’s entry into Nigeria as destroying value. Rather, we believe it is the impetus required to stimulate growth. The recent amalgamation of Heineken’s breweries (Nigeria and Consolidated) has also put Heineken in the right position to stimulate the value portfolio, in our opinion. Its value brand 33 Export has strong positive national brand awareness and distribution. Overall, we see both Heineken and SABMiller winning long term in a market that has yet to reach its potential.
Page 50 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Assuming investment continues to be prioritized Africa has been SABMiller’s top strategic priority in terms of investing for growth. Capex expressed as a percentage of sales (subsidiaries only) over the last six years has averaged 25% vs. the group at 12%. This investment rate is also at a multiple to those of Latin America (9%) and South Africa (7%).
Averaging 20-25% of group total annual capex, investors must be aware that this investment drive is dilutive to SABMiller’s near-term investment returns. We project that from FY14 to FY18 the brewer’s ROIC will increase only marginally from a relatively mediocre10.3% to 10.6% and FCFROI from a paltry 3.1% to 3.7%.
Figure 106: Investing for growth in Africa – SABMiller Figure 107: Capex as a share of revenue regional capex/net revenues (acquisitions excluded)
30% 25% 23%
25% 20%
20% 15%
Europe 11% 15% 10%
Group Africa Capex/NPR 10% Latam SA Expenditures/Revenue Capital 5% Beverages 5% 0% North America Asia-Pacific SABMiller Group SABMiller Africa 0% 2012 2013 2014 FY09 FY10 FY11 FY12 FY13 FY14 Group North America Latin America Europe Africa Asia-Pacific
Source: Deutsche Bank, Company reports, SABMiller Africa excludes South Africa Source: Deutsche Bank, Company reports, SABMiller Africa excludes South Africa
When growth has stalled in Africa for SABMiller, it is due to lack of investment, or a delay in timing. Until 2009, investment was slacking, which caused a backlog and full capacity utilization. An occasional conservative streak also caused SABMiller to miss opportunities in Ethiopia and Nigeria; instead, it invested in Australia. With the current pressures elsewhere in the group, and given the capital and managerial intensity required for its global centralization initiatives, we are concerned that the region will not be allocated the capital required to stimulate growth.
While the merger of the South African and rest of Africa businesses introduces strategic and marketing alignment, we also see longer-term investment and cost synergies being captured. This is essential as the investment cycle for the long-term growth opportunity in Africa still has many years to play out.
Deutsche Securities (Pty) Ltd Page 51
4 February 2015
Beverage Beer
Coca Cola Beverage Africa to drive further growth In December 2014, SABMiller announced plans to merge its existing Coke bottling businesses with those of SABCO, to create a south/eastern African business operating across 12 countries. This makes SABMiller the 10th largest Coca Cola bottler worldwide and doubles down on Africa. We believe this is a good deal and more likely to mark the first step in a bigger phase of deals between beer and soft drinks businesses, where we see considerable opportunities.
Creating a separate business unit, the transaction combines African soft drink operations of SABMiller, SABCO and The Coca Cola Company (TCCC). The respective shareholdings are based on respective profit contribution but with a small control premium paid to Gutsche Family Investments (GFI), which owns SABCO.
The size of the TCCC bottler market in Africa closely resembles that of beer and exceeds just over 100 million hl. With average revenue of €70/hl and EBITA margins ranging from 6% to 10%, we estimate the profit pool for the bottlers now exceeds $1 billion. The deal effectively gives SABMiller 40% of the volume and almost 50% of the profit pool for Coca Cola in Africa.
Figure 108: Africa TCCC bottler volume share Figure 109: Estimated bottler profit split
Delta (Zimbabwe) HeinekenDelta (Zimbabwe) Others Heineken Others Penbev 2% 3% 2% 1% Penbev 3% 3% (South Africa) (South Afric) 1% 4% MAC (Egypt) 4% MAC (Egypt) CCBAfrica CCH (Nigeria) 7% 6% 40% ECCBC 7% CCBAfrica CCH (Nigeria) 48% 11%
ECCBC 10% Castel Castel 27% 20%
Source: Deutsche Bank estimates, company reports, Euromonitor Source: Deutsche Bank estimates, company reports, Euromonitor
As discussed in our note on December 2nd, SABMiller- Bottling the growth, we believe SABMiller will likely seek to include Coca Cola operations from Castel. This may be more difficult as Castel has very profitable non-Coca Cola portfolios and is rightfully wary of getting too close to TCCC as we discuss in more detail on page 112.
The rest of Africa, however, also provides further opportunity for consolidation under one African mega bottler, including the Nigerian operations of Coca Cola Hellenic, attractive bits of ECCBC in West Africa including Ghana, or further consolidation of the market in Kenya.
Page 52 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Next 18 months should see acceleration in Africa FY15 started tough with SABMiller’s African subsidiaries facing political disruptions (Mozambique, South Sudan) and major excise increases (Tanzania, Zambia) in its core markets. We estimate that were it not for the Nigeria subsidiary, beer volumes would have been flat in 1HFY15. However, the next 18 months have some significant tailwinds, as already seen in the latest Q3 update.
Following the political accord and successful elections in October 2014 in Mozambique, consumer confidence is returning and distribution is now much less disrupted. This is resulting in the country returning to expected run rate. Expats have also returned to South Sudan, which is now gradually ramping up capacity from maintenance levels.
Zambia is still cycling the major impact of the +50% excise increase in January 2014. Although this is now mainly a Chibuku market, the country operating margin has seen some deterioration. The situation is similar for Tanzania following a +20% excise increase in July last year.
Nigeria continuous to see very good volume growth at around 20-30%, which will be supported by the additional capacity at the Onitsha brewery that came on stream at the close of 2014. Commissioning of new capacities in 2015 remains on track for Ghana (Accra brewery), Uganda, and Zambia (Chibuku brewery in Lusaka).
Castel also likely to see a better FY16 Castel is the large brewer that has really been impacted by the Ebola crisis. On a market level, the Ebola epidemic has only impacted in Guinea (West Africa), but we estimate that the market makes up <3% of EBIT. More significant have been the infrastructure disruptions in Francophone Africa impacting import. Normally, ships are routed past Ebola-impacted markets such as Liberia and Sierra Leone. Those that were re-routed, however, were denied porting in other markets, including the critical ones for Angola and Cameroon, which impacted supplies and sales in the H1.
Ramadan, interestingly, has also been a factor (it fell in July last year, earlier than before). It typically results in beer orders rapidly slowing in the three weeks earlier. Ramadan has different impacts per region – in Nigeria it results in higher consumption of soft drinks (at expense of beer) whereas in Morocco and Tanzania both beer and soft drinks are lower.
We expect volumes to accelerate again, though soft drinks may face some pressure. As a €-dominated business, US$ inputs on concentrate pricing will have an impact. We also see increasing competition from low-priced b-brands, though the company recently complemented its (non-Coca Cola) portfolio with a recent new stake in Sumol + Compal, a leader in soft drinks and juices in Portugal.
Deutsche Securities (Pty) Ltd Page 53
4 February 2015
Beverage Beer
South Africa may yet surprise The integration of the South Africa operations into the new Africa division is primarily about leveraging SAB’s strong capabilities and platform into Africa. However, we also see it as an opportunity to infuse some of Africa‘s entrepreneurial spirit and innovations into South Africa. We see no near-term impact from cost synergies and rather improving top-line performance.
We are also seeing an acceleration of the innovation pipeline in both product and sku range. Recent innovations include Castle Milk Stout Extra Smooth (in cans) and Chocolate-infused Castle Milk Stout as well as the test launch of Ndlamhu in Kwazulu Natal, a sorghum-based lager that generally appeals to lower-income consumers. This product could transform the beer market, adding another engine of growth. Over Christmas, we also had a (hopeful) glimpse of the relaunched Lion Lager, a brand terminated in 1999 but historically strongly associated with Rugby. Perhaps a launch in time for the Rugby World Cup?
Signs that the South African consumer may start to recover in 2015 The macro environment in South Africa remains challenging for consumer spending, in particular affecting the core brands of SAB that sell into middle- to lower-income markets. In what appears to be a two-speed economy, higher- income earners are maintaining healthy spending levels. So, premiumisation (mix gains) is a key performance feature at present, as is evident from Castle Lite’s strong performance.
However, in our January 18, 2015 note South Africa: Consumers will be smiling, DB raised its forecast for South Africa’s GDP growth rate to 2.8% in 2015 (from 2.6%). This would represent a meaningful uptick from 1.4% in 2014, albeit from a low base. Consumer demand growth should improve to 2.8% from 1.2% last year, thanks to general improvement in purchasing power.
Figure 110: Breakdown of GDP growth points to SA consumer revival
6 % point contibution to yoy growth
0.7 4 1.1 0.0 0.3 0.7 1.5 0.6 0.7 0.5 0.7 2 0.7 0.3 0.3 2.9 0.5 2.0 1.8 0.4 1.7 1.7 0.7 0 0.0 -1.6 -1.7 -2.5 -2 2011 2012 2013 2014E 2015F 2016F Net trade Inventories & residual Investment Government Households Source: SARB, Deutsche Bank, SARB
Factors driving this improving outlook include lower fuel prices, lower inflation outlook (benefiting real income) and improving consumer balance sheets. In this report our economist also changed her view on interest rates, now expecting flat rates in 2015 versus the prevailing view of a 50-75bps increase.
Page 54 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 111: Largest moderation in food inflation since Figure 112: Households’ financial vulnerability* to 2010 diminish for the first time in three years yoy % 21 75 yoy % % yoy Threshold where Index *ZAR and world food 12 downside risks to HCE 20 18 60 index sustained at Jan DBe start accelerating DBe levels 10 15 30 45 8
30 12 6 40 15 9 4 50 0 6 2 -15 3 0 60 -2 -30 0 70 2004 2006 2008 2010 2012 2014 2016 -4 Economist world food price index (lead 4 months)* 2002 2004 2006 2008 2010 2012 2014 2016 Fuel price Household consumption expenditure CPI food (RHS) Financial vulnerability index (lead two quarters) * This financial vulnerability index is a diffusion index of key indicators that affect balance sheet health of consumers. Above 50 denotes rising financial vulnerability, and below 50 shows improved financial health. Source: Deutsche Bank, StatsSA, I-Net Bridge Source: Deutsche Bank, SARB
We have taken the conservative approach and our projections for SABMiller’s South African business do not incorporate this change in economic outlook yet. This offers upside risk to our FY16 outlook
.
Deutsche Securities (Pty) Ltd Page 55
4 February 2015
Beverage Beer
The other 2/3rds clipping the wings
Key markets under pressure The portfolio effect that smoothes earnings for Africa should as well be applicable for the broader SABMiller group. However, a few big chunks are swing factors. Those chunks are not doing well, and in the short term offset the potential and growth of Africa.
Key markets such as Colombia, South Africa and Australia have a disproportionate impact (Figure 113). The challenges in these markets due to both consumer sentiment and the currency impact on reported earnings are currently inhibiting growth for the group as a whole.
Figure 113: Key markets 1% volume growth impact on group EBITA
Colombia SA Beer MillerCoors Australia Peru Castel SA soft drinks Poland Euador Czech Tanzania China Efes Mozambique Zambia Italy India 0.00% 0.02% 0.04% 0.06% 0.08% 0.10% 0.12% 0.14% 0.16% 0.18% 0.20% EBITA group growth on 1% market volume growth
Source: Deutsche Bank estimates, company reports
The disappearing margin target Guiding margin on a group level for a complex organization such as SABMiller is an ambitious endeavor. Management exercises limited control, if any, on 1/3rd of its EBIT. The Castel, Efes, CRE associates and MillerCoors joint ventures are independently run, with the latter getting disproportionately more attention from MolsonCoors than from SABMiller. The recent involvement of European management in Efes is encouraging, but Russia’s challenges are bigger.
Additionally, geographical mix will challenge future margin expansion. The slowdown in growth in China and Efes should actually help margin expansion, but as Figure 114 shows, if Colombia and Australia sneeze, the whole group gets a cold. They are sneezing.
Page 56 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 114: Key markets 1% volume growth impact on group margins
Colombia Australia SA Beer Peru Ecuador Tanzania Czech Castel Mozambique Poland Zambia Italy India SA soft drinks Efes China MillerCoors -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 EBITA group margin basis points impact on 1% market volume growth
Source: Deutsche Bank estimates, company reports
A major consequence in a world with low inflation (not to talk about deflation) and low demand growth is lower static pricing power by consumer companies. In our view, a key decision that SABMiller will have to make is choosing between volume growth and margin growth as the driver of profits. We also believe SABMiller may have to consider a more optimum volume-based growth strategy in high-margin Latin America, and Colombia in particular.
Australia - negative swing factor to group results Due to its high margins and size, Australia is a key swing factor for SABMiller group. However, there appears to be no let-up in the decline of Aussie beer volumes, which are down 2.0-2.5% on an MAT basis, with a structural rate of decline of ~1% p.a. Within beer categories there are major divergences, with a higher rate of decline in full-strength beer (-10% p.a.), light (-13%) and domestic premium (-6%), whereas there is growth in mid-strength (+4%), imported international premium (+8%) and crafts (up double digits). Beer share of LAE continues to track marginally down. RTD is losing share to cider, but here the growth is with brands other than CUB/Lion that both continue to lose share.
Feedback from the company and trade indicates that a major part for the decline in CUB's NPR/hl in H1 was due to a new agreement with Coles, which came at a major cost to margins, as is now evident. We see this resulting in significant downward pressure on pricing overall, as CUB's attempts to regain share at the key national accounts is likely to lead to weak pricing into FY16 if not longer term.
The overall implication is that the pricing and margin reset of CUB in 1HFY15 is expected to remain into the 2H as well as FY16. We believe the company will face an ongoing strategic decision between protecting margins and going for growth. First signs suggest that management is opting for growth. However, in light of the expectations for growth, we also believe the company needs to consider an impairment charge, as current profitability levels are unlikely to justify the original purchase price.
Deutsche Securities (Pty) Ltd Page 57
4 February 2015
Beverage Beer
Centralization programs a point of parity, not savings Highly centralized management structures work in no-growth areas. That is why the alphabet soup of programs – TCM at Heineken, BSP at Carlsberg, BCP at SABMiller – finds such rich pickings in Europe. However, when growth hits the African rates of double digits, the slow decision-making processes of a multinational cannot keep up. Putting together risk-based matrices by McKinsey consultants in London does not help one compete and invest ahead of demand in Accra or Nairobi.
Rather surprisingly and contrary to previous policy, at the results in May SABMiller announced another cost-saving program and gave it a number – US$500m by FY18 – 15% of which is to drop to the bottom line in FY15. We are being conservative and choosing not to apply the cost-saving target to our model. Historically, savings programs such as TCM at Heineken are hard to find being dropped down to the P&L. As we see it, the programs are necessary to get some basics in place when the brewers are lagging the rest of their staples peers. Additionally, they provide an opportunity to allocate costs to non-recurring/exceptional items, which benefits adjusted EPS (also instrumental in management compensation schemes).
We favor the approach taken by ABInBev and Unilever, which see cost-cutting as analogous to cutting your fingernails and ERP/SAP programs as a regular cost to business. Routine maintenance must be done on a regular basis, and investing in iPads should not be treated as an exceptional cost – so why should belated savings programs and bigger, fancier PCs warrant special status?
Page 58 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The unnecessary put option
ABInBev/SABMiller unlikely to happen As has long and widely been discussed in the press (a quick Google search brings up 3300 results for the phrase ABInBev SABMiller acquisition – most recently Business Day on January 25), the market’s belief seems very strong that one day, sooner or later, ABInBev will revert to what it knows best – acquiring brewing companies following its vision to Dream Big and create Megabrew. And that SABMiller is next in line.
This potential tie-up has been mooted since the mid-1990’s, when an acquisition of SABMiller was first suggested by the likes of Anheuser Busch and the discussions with Interbrew in 2002. We have lost count of the number of times that a normally solid source (e.g. the Wall Street Journal) has reported that a deal may be imminent. The recent conjecture reminded us of similar scenarios in 2004 and 2008 (sources at the time: FT and WSJ). We assume that most of the time, ABInBev is probably preoccupied with other thoughts, like running its current business. When management does review its M&A agenda, we see only the slightest probability of ABInBev acquiring SABMiller anytime soon, given that ABInBev excels in managing and turning around large-scale operations that are inefficient whilst SABMiller is a collection of small-scale operations that are as, if not more, efficient than ABInBev.
Limited scale opportunity in an efficient business Anheuser Busch, Mexico, Brazil, China are big chunks. These are problems that require sharp focus. Smaller problems are relegated, such as European operations like StarBev. The company operates – and has thrived on – the 80/20 principle. The problem with SABMiller is that it doesn’t have big problems. It has many small problems. The fragmentation of its business is its biggest weakness, and also one that requires a multitude of solutions.
The big chunks that ABInBev has tackled in the past were also profoundly Figure 115: Colombia & Brazil inefficient and ripe for its Zero Based Budgeting (ZBB) programs. When entering the old Anheuser Busch, private jets, zoos, and corporate hideaways 100 60%
52% 53% EBITDAmargin were easy pickings. Manufacturing and supply-chain optimization programs 80 40% further enhanced the margins of the traditional family business. 60 40 20%
SABMiller is not a family business, and it has developed or adopted many of (mhl) volume 20 the same business practices (including ZBB in Latin America). Considering its 0 0% disadvantaged scale in the many smaller markets, margins at SABMiller are SAB ABInBev volume (mhl) Colombia Brazil comparable if not better. ABInBev’s Brazilian business has 4x the beer volumes EBITDA% of Colombia, yet the margins are the same. Perhaps ABInBev could benefit Source: 2015 Deutsche Bank estimates, company reports from SABMiller’s efficiency skill set more than the other way around.
Any deal would also limit any benefits from further scale. With the exception of China, it is unlikely that any market overlap would be allowed. Benefits from procurement services would probably be too small to notice at that level (would Coke necessarily get a better deal on sugar if it bought Pepsi?). Like any well-entrenched FTSE-20 company, the headquarters in Woking, UK, has the usual corporate excess (and expanding rapidly), but not enough to make a deal sensible, in our opinion. Admittedly, SABMiller has a private jet. But that actually IS needed to get around Africa.
Deutsche Securities (Pty) Ltd Page 59
4 February 2015
Beverage Beer
Buying the growth would likely result in leakage If ABInBev does not buy SABMiller as an opportunity for cost savings, its interest – so the argument goes – would be to buy the growth. We believe that has some merit. ABInBev is indeed disadvantaged in its current growth profile. The US should benefit from a consumer recovery, but we favor spirits over beer in that scenario. The cost savings in Mexico should be achieved, and growth should be good – but not exciting. And Brazil is hitting the maturity scale in beer with per capita consumption and share of alcohol hitting US levels.
SABMiller has the growth, especially in Africa. However, there are risks. Part of its growth is tied up in a web of relationships. There is no guarantee that the option to buy Castel would remain intact, and we assume that Castel would get the better result and possibly activate its options to buy part of SABMiller Africa. Coca Cola bottling contracts all have change-of-control clauses. The new CCBA set-up makes it more likely that the other partner, the Gutsche family, would take control. Expatriate management share options would actualize – many would be comfortable, and we are not sure how many Brazilians would want to work in Onitsha, Nigeria.
If you dream, you may as well Dream Big and have a Coke “It takes the same amount of More attractive opportunities exist for ABInBev. A strong dividend yield after energy to dream big as to years of investment and a desire to drive an international portfolio containing dream small. So dream big Corona, Budweiser, and Stella keep management occupied. but stay humble” ABInBev CEO If you are going to dream, however, you may as well – to quote the ABInBev CEO – Dream Big. ABInBev aspires to be one of the leading consumer staples November 2013 companies in the world. As we have discussed in previous notes, we see the next phase in mega-M&A as likely to be about integrating beverages. SABMiller has already started the process on the bottling side with CCBA, but we believe that ABInBev is in a position to reassess the whole system.
Ultimately, the archaic nature of the brand owner/bottling system needs to be revisited. Separating the brand owner (Coca Cola) and the bottlers is a system that harkens back to the 19th century, when bottling soft drinks was seen as an unhygienic and dangerous process. The same was true for beer at the time: in the 19th century, bottling was outsourced as the brewers focused on kegged beer in the immediate radius of the brewery in the same manner that Coca Cola focused on fountain sales in the greater Atlanta metropolis. With the advent of refrigerated railway cars (which stimulated the growth Anheuser Busch and of beer following the Civil War in the US) and better pasteurization techniques (which prompted the early days of exports for Heineken), the brewers decided to take the bottling in-house.
Coca Cola over the last century has taken a somewhat mixed approach, mostly outsourcing the bottling – and the intimacy with the customer and consumer that this implies. The result is an inefficient and slow system that stifles growth. A re-organization is underway in the Coca Cola system, and ABInBev terms such as Zero Based Budgeting used to satisfy the market. But why copy a system when the originators of that skill set can do a better job? Sounds a lot more attractive than going after the complexity that SABMiller entails if you are Dreaming Big.
Page 60 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Valuation and key charts
Valuation We base our £35/ZAR630 price target on a DCF-model, the core assumptions behind which are a WACC of 7.89% (incorporating a levered beta of 1.18, net debt / EV ratio of 20%, risk-free rate of 4.00% and 4.30% cost of debt), medium-term cash flow growth of 5% a year, and a post year-10 terminal growth rate of 2.0% . We view our terminal growth rate of 2% as conservative number, below the embedded volume growth rate of 2.5%.
Figure 116: SABMiller target price sensitivities TP per Share (£pence) WACC Terminal Growth Rate 7.18% 7.43% 7.68% 7.93% 8.18% 8.43% 8.68% 2.75% 4,659 4,398 4,166 3,958 3,770 3,600 3,445 2.50% 4,452 4,214 4,001 3,809 3,635 3,477 3,333 2.25% 4,264 4,046 3,850 3,672 3,511 3,364 3,229 2.00% 4,093 3,892 3,711 3,546 3,395 3,258 3,131 1.75% 3,937 3,751 3,582 3,428 3,288 3,159 3,040 1.50% 3,793 3,620 3,463 3,319 3,187 3,066 2,954 1.25% 3,660 3,499 3,352 3,217 3,093 2,978 2,873 Source: Deutsche Bank estimates
Our upside/downside risks include government taxation, consumer sentiment in Latin America and Africa, developed markets competitive pressures and M&A, real and perceived.
Deutsche Securities (Pty) Ltd Page 61
4 February 2015
Beverage Beer
Figure 117: SAB price index vs. consensus forecast NTM Figure 118: SAB earnings index relative to Brewers index earnings (US$) (US$)
Valuation overshot after period of strong earnings momentum: 1.6 2000 From early 2009 to late Dec 2012 SABMiller's share price tracked a As the brewer with the highest emerging market exposure SABMiller historically has seen major relative underperformance in US$ 1800 postive earnings momentum trend in US$. However, after earnings momentum has gone flat tish from beginning 2013 high volatility has 1.5 earnings growth to the brewer peers group (based on 12-m forward 1600 been seen in the share price and by implication investment rating. It is consensus EPS forecasts) . also evident how at the time when the 12-m forward earnigs forecasts 1.4 1400 started to go flat the share price momentum actually accelerated. During the current slowdown in emerging market growth SABMiller's 1200 1.3 relative earnings underperformance to the brewer index in US$ has not been as dramatic as historically given higher regional and by 1000 1.2 implication forex diversification. 800 1.1 600 1 400 200 0.9
0 0.8
06 07 08 09 10 11 12 13 14
13 07 08 09 10 11 12 14
14 07 08 09 10 11 12 13 15
07 08 09 10 11 12 13 14
------
------
------
Jun 06 Jun Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun
Dec 13 Dec Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 14 Dec
Jul Jul Jul Jul Jul Jul Jul Jul
Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct
Jan Jan Jan Jan Jan Jan Jan Jan Jan SABMiller price index (US$ base) SABMiller earnings index (US$ base)
Source: Deutsche Bank, Datastream Source: Deutsche Bank, Datastream
Figure 119: SAB NTM rolling PE Figure 120: SAB NTM PE relative to global peer group
1.3 Current = 19.9x Current = 1.00x 22 Mean = 15.3x Mean = 0.97x +1 SD = 18.0x 1.2 +1 SD = 1.13x +2 SD = 20.7x 20 1.1
18 1.0
16 0.9
14 0.8
0.7 12 0.6 10 0.5
8
Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun
Dec 05 Dec 12 Dec Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 13 Dec 14 Dec
Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun
Dec 00 Dec 08 Dec Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec
SABMiller 12 month forward PE Mean +1 Standard deviation band +2 Standard deviation band 12 month forward PE of SABMiller relative to global brewers (excl SABMiller) Mean Standard deviation band
Source: Deutsche Ban, Datastream Peer group, market capitalisation weighted: ABI, Heineken, Carlsberg, Molson Coors and Anadolu Efes Source: Deutsche Bank, Datastream
Figure 121: FY15DBe Volume Figure 122: FY15DBe Revenue Figure 123: FY15DBe EBITA
Latin Asia Latin Asia Asia America 16% America 11% 22% 20% 24% Latin America 35%
Africa 31% Europe Africa 18% 27% Europe 17% Africa Europe 28% N America N America N America 10% 12% 16% 13%
Source: Deutsche Bank estimates Source: Deutsche Bank estimates Source: Deutsche Bankestimates
Page 62 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 124: SABMiller 1yr fwd P/E Figure 125: SABMiller consensus EPS revision
25 3.5
20 3.0
2.5 15
2.0 10
1.5 5
1.0
0
99 00 01 02 05 07 08 10 11 13 03 04 06 09 12 14 15
99 01 02 04 07 09 10 12 13 00 03 05 06 08 11 14
------
------
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul
Jul 2008 2009 2010 2011 2012
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 2013 2014 2015 2016 2017 Source: Deutsche Bank, Datastream Source: Deutsche Bank, Datastream
Figure 126: SABMiller revenue growth vs EBIT margin Figure 127: Organic growth by division 2015-17 CAGR
9% 12% Africa 8% 10% 7% 6% 7.9% Latin America 8% 5% 4% 6% 3% Asia N America 4%
2% 18 DBe annualDBe 18 averagerevenue - 1% 2% 0% 2016 Europe -1% 0% SABMiller Lat Am Europe N America Africa Asia 15% 20% 25% 30% 35% 40% 45% Volume Revenue EBIT EPS 2015DBe EBITA margin Source: Deutsche Bank estimates Source: Deutsche Bank estimates, Company data
Deutsche Securities (Pty) Ltd Page 63
4 February 2015
Beverage Beer
Africa leading the growth
The global beer growth engine
Driver of global beer volume growth In our note of the 29th of July, Beer: Tapping into Growth, we analyzed the potential of a 194 beer markets. We reviewed the factors that should drive growth in beer:
The right population dynamics, in the right age cohort,
Sustainable GDP growth, and assessing the inflection points where per capita consumption accelerates and decelerates,
Cultural and religious influences,
The ability to take share from other forms of alcohol, in the case of illicit alcohol, or the danger of losing to more refined, branded spirits. Our findings pointed to the vast potential of Africa as the core engine of volume growth, contributing a forecast 40% of global growth in the next decade.
Figure 128: Global beer volume growth by region and decade
100% 5% 12% 80% 37% Africa
60% Latin America 28% Asia ex-China 40% China Eastern Europe 22% 20% Western Europe North America 0% 1995-2005 2005-2015 2015-2025DBe -20%
Source: Deutsche Bank estimates, Plato Logic, World Bank
In the decade from 1995 to 2005, volume growth in the global beer industry came from two sources. The post-Communist era opened up Eastern Europe, accounting for 31% of the growth. Per capita consumption of beer doubled, compounding at 8% annually at the expense of vodka. Asia, led by China, accounted for 48% of the growth, as beer became the primary accompaniment to meals, replacing water as had been the case in Europe two centuries before. Africa at that time accounted for only 5% of global volume growth.
Page 64 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The decade from 2005 to 2015 has been dominated by China, moderating in the last several years as per capita consumption hits Asian norms. 70% of the volume in the last ten years has been due to Asia. Africa’s contribution more than doubled as Africa accounted for 12% of the growth.
The next decade belongs to Africa Our analysis indicates that the next decade of growth should belong to Africa, with 40% of the projected volumes to come from the sub-Saharan region. For those with longer time horizons, Africa should account for over 60% of volume growth driven by favorable population dynamics
Figure 129: Volume growth contribution 2015-2025DBe Figure 130: Volume growth contribution 2025-2050DBe
Western Europe North America Western Europe North America 0% 3% 3% 3% Asia 14% Asia Latin America 25% 19% Australasia 1%
Latin America Eastern Europe 27% -3% Australasia 1% Eastern Europe 3%
SS Africa SS Africa 38% 60%
Source: Deutsche Bank estimates, Plato Logic Source: Deutsche Bank, Plato Logic
We forecast 8% annual volume growth over the next decade, a slight acceleration over the previous ten years.
Figure 131: Africa growth
300000 40.0 Volume 35.0 250000 PCC 15+ 2015-2025DBe CAGR Volume: 8% PCC: 4% 30.0 200000 2005-2015DBe CAGR 1995-2005 CAGR Volume: 6% 25.0 Volume: 3% PCC: 1% 150000 PCC: 0% 20.0 15.0 100000 Volume ('000Hl) Volume 10.0 50000
5.0 Per Capita Capita PerConsumtion (pop15+) 0 0.0
Source: Deutsche Bank estimates, Plato Logic, World Bank
Deutsche Securities (Pty) Ltd Page 65
4 February 2015
Beverage Beer
Value and profit pool growth> volume growth Due to the concentration of few players and dominant market shares, Africa also enjoys relatively high revenue per hl and profit margins. Thus, the value and profit pool growth in Africa over the next decade should exceed its volume contribution. The volume growth in Africa is profitable growth.
Figure 132: Africa profit (EBIT) contribution 2015-2025 (2015 US$) Unlike China, volume growth in Africa should be profitable 100% growth
80% 37% 42% Africa
60% Latin America 28% Asia ex-China 29% 40% China North America 22% 20% 21% Western Europe 9% Eastern Europe 0% 2025DBe Volume 2025DBE EBIT -20%
Source: Deutsche Bank estimates, Plato Logic, company reports
In constant currency, we see the global profit pool expanding US$11.5 billion by 2025. With dominant market shares and strong moats around current operations, the average 25% EBIT margin US$105 per hl of revenue in the continent should be sustainable, with Africa accounting for almost US$5 billion, or 42%, of the additional profit pool over the next decade.
Figure 133: Regional volume and profit pool growth contribution to 2025
160 $6.0 Newprofit 2015 140 134 Volume mhl (left axis) $4.9 $5.0 EBIT US$bn (right axis) 120 101 $4.0
100 -
$3.3 2025(2015 US$ billions) 2025 2025 (mhl) - 81 80 $3.0 $2.5 60 $2.0 40 New volume 2015 volume New $1.0 $1.0 14 20 12 11 9 $0.3
0 $0.0 Africa Latin Asia ex- China Eastern Western North America China Europe Europe America
Source: Deutsche Bank estimates, Plato Logic, company reports
We also see Latin America accounting for a significant proportion of the profit growth in the next decade, with a shift to the Andean region and Mexico, away from historical growth delivered by Brazil. Asian growth ex-China continues to be profitable with average revenue per hl of US$85 and margin of 25% on average. Markets such as Vietnam and Myanmar should drive the growth.
Page 66 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 134: 2015 and 2025 global beer profit pool (constant currency) 2015 volume 2015e EBIT 2025e new 10yr margin 2025e new 2025e EBIT (mhl) 2015e rev/hl margin 2015e EBIT volume (mhl) growth EBIT (US$ bn) (US$bn) Africa 119 $105 25% $3.1 134 5% $4.9 $8.0 Asia ex-China 204 $85 25% $4.3 81 3% $2.5 $6.8 China 551 $35 8% $1.5 14 5% $1.0 $2.6 Eastern Europe 217 $70 15% $2.3 12 -3% -$0.4 $1.9 Latin America 333 $95 35% $11.1 101 0% $3.3 $14.4 North America 270 $120 30% $9.7 9 0% $0.3 $10.0 Western Europe 279 $100 15% $4.2 11 -1% -$0.1 $4.1 Total 1,972 $36.2 363 $11.5 $47.8 Source: Deutsche Bank estimates, Plato Logic, company reports
We don’t see China contributing more than 9% of additional profit. Despite being over 25% of global volume, today its contribution to global profit is only 4%, on our estimates. We are skeptical of China’s ability to grow its low revenue per hl (US$35/hl) significantly above inflation. We liberally assume that margins in China will expand 500bps of its low base of c. 7%. If we double that figure, Chinese contribution would still be only 16% of the global profit pool expansion.
It is worth noting that Africa’s top-line growth to the profit pool has significantly outperformed China already in the past. Not until 2006 did SABMiller’s China business surpass the contribution of Swaziland.
While China added 250 million hl in the last decade, it expanded the global profit pool just shy of US$700 million. Africa in the same decade expanded its volumes only 1/5th of China, or an additional 50 million hl. Yet it added US$1.3 billion of profit.
Figure 135: Africa and China volume & profit growth 2005-2015
300 Volume mhl (left axis) $1.3bn $1.4 EBIT US$bn (right axis)
247 $1.2 Newprofit 2005 250
$1.0
200
2015 2015 hl) (m -
$0.8 - $0.7bn 2015(2015 US$ bn) 150 $0.6
100 $0.4
New volume 2005 volume New 50 50 $0.2
0 $0.0 China Africa
Source: Deutsche Bank estimates, Plato Logic, company reports
Deutsche Securities (Pty) Ltd Page 67
4 February 2015
Beverage Beer
Key markets for growth
Top markets for growth As recently discussed in our staples sector 2015 outlook note on 12 January 2015, Here we go again, 2/3rds of EM consumer staples growth is from smaller, less developed countries outside the usual BRICS and CIVETS. And such it is with beer.
We expect Nigeria to be the largest contributor to volume growth in Africa, but the next six markets from Mozambique to the Democratic Republic of Congo should contribute between 5% and 8%
Figure 136: Beer volume contribution by 2025 Figure 137: Share of the volume growth in Africa by 2025 Cameroon 30000 Ghana RwandaCote d'Ivoire Mozambique 4% 4% 3% 3% 5% Zimbabwe Burundi 25000 Angola Additional 135 million hl by 2025 Ethiopia 3% 3% 2% 6% Zambia 20000 3% Madagascar 2% Kenya Benin 15000 6% 2% South Africa 10000 2% South Sudan Uganda 5000 1% 7% Togo New volume by 2025 ('000Hl) 2025 by volume New 1% 0 Malawi 1%
Burkina Faso
Togo Chad Benin 1%
Kenya Tanzania
Ghana Liberia Gabon
Bissau
Malawi
Angola
Nigeria
Guinea
Zambia
-
Burundi
Uganda Gambia
Lesotho
Ethiopia
Rwanda
Namibia
Senegal
Morocco
Mauritius Tanzania
Botswana 8%
Swaziland
Zimbabwe
Cameroon
South South Africa
Madagascar
Cote d'Ivoire Cote
Congo, Rep. Congo,
Mozambique
Sierra Sierra Leone
South South Sudan BurkinaFaso Guinea Congo, Dem. Rep. Congo, Dem.Congo, Rep. 8% Nigeria 21%
Central African Central Republic
Source: Deutsche Bank estimates, Plato Logic, company reports Source: Deutsche Bank, Plato Logic, company reports
The fastest-growing markets tend to be those with a low base, but with the right dynamics in place. Like Angola a decade ago, we expect countries such as South Sudan, Uganda and Ethiopia to lead the growth as population dynamics, share gains from alcohol, and the establishment of broader brewing footprints by the leading players stimulate growth.
Figure 138: Forecasted fastest-growing markets in Africa to 2025
18% 16% 14% 12% Africa volume CAGR to 10% 2025 of 7.8% 8% 6% 4% 2%
0%
CAR
Togo
Chad
Benin
Kenya
Liberia Ghana Gabon
Bissau
Malawi
Angola
Nigeria
Guinea
Zambia
-
Burundi
Uganda
Lesotho
Ethiopia
Rwanda
Namibia
Senegal
Morocco
Mauritius
Tanzania
SS Africa SS
Botswana
Swaziland
Zimbabwe
Cameroon
South South Africa
Madagascar
Cote d'Ivoire Cote
Congo, Rep.
Mozambique
Sierra Sierra Leone
South South Sudan
Gambia, The Gambia,
BurkinaFaso Guinea
Congo, Dem. Rep. Congo, Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Page 68 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Zimbabwe
Zambia
Uganda
Togo
Tanzania
Swaziland
South Sudan South
South Africa South
Sierra Leone Sierra
Seychelles
Senegal
Sao Tome and Principe and Tome Sao
Rwanda
Nigeria
Namibia
Mozambique
Morocco
Mauritius
Malawi
Madagascar
Liberia
Lesotho Kenya
Bissau - Guinea
Guinea
Ghana
Gambia, The Gambia,
Gabon
Ethiopia
Eritrea
over three decades over three Guinea Equatorial
Cote d'Ivoire Cote
Congo, Rep. Congo,
Congo, Dem. Rep. Dem. Congo,
Comoros
Chad
Central African Republic African Central
Cabo Verde Cabo
2005 CAGR 2005 CAGR 2015DBe CAGR 2025DBe Cameroon
- - -
Burundi
Burkina Faso Burkina
1995 2005 2015
Botswana
Benin
Angola Africa sub Sahara sub Africa 8% 5% 0% 5%
-
10% 10% 15% 20% - % CAGR lager volume growth volume lager CAGR % estimates, Plato Logic, company reports, World Bank World reports, company Logic, Plato estimates,
10 year CAGR volume growth by African market by African growth 10CAGR year volume
: 139 Figure Figure Source: Deutsche Bank Deutsche Source:
Deutsche Securities (Pty) Ltd Page 69
4 February 2015 Beverage Beer
Nigeria Nigeria is Africa’s biggest long-term opportunity in beer. Based on our projections, the size of the beer market in volume is likely to overtake that of South Africa by 2030. What makes this such an attractive market is that it is Africa’s most populated country (172m), per capita income in the coastal regions is now breaking above the US$1,000 level where demand growth for formal packaged goods tends to rise sharply, it has a tradition of good-quality beers and a rising level of competitive brewer activity is stimulating consumption growth.
Figure 140: Nigeria PCC and volume growth projection
60000 40.0 Volume 15+) (pop Consumption Capita Per 35.0 50000 PPC 15+ 2015-2025DBe CAGR Volume: 9% PCC: 6% 30.0 40000 2005-2015DBe CAGR Volume: 8% 25.0 PCC: 5% 30000 1995-2005 CAGR 20.0 Volume: 8% PCC: 5% 15.0
20000 Volume ('000Hl) Volume 10.0 10000 5.0 0 0.0
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Affordability in Nigeria, as across Africa, remains a challenge for beer. However, the development of quality beers in the mainstream and economy segments will not only increase affordability but through route-to-market developments increase accessibility as well.
Figure 141: Beer share of alcohol in Nigeria Figure 142: Time worked to afford a beer in Nigeria <30minutes Beer Branded <2hours 1% 8% spirits 6% 1% <4hours 20%
>4hours 73% Illicit alcohol Per capita Absolute Alcohol: 10l 91% Abstainers from Alcohol: 56%
Source: Deutsche Bank estimates, WHO Source: Deutsche Bank estimates, PovCal, company reports
Page 70 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The Nigerian beer market has traditionally been a near duopoly, with Nigerian Breweries (Heineken 54% interest) having an estimated market share c. 70% and Guinness Nigeria (Diageo 54% interest as well) at c. 20%. The new kid on the block, namely SABMiller, has since entry in 2008 developed organically to a market share of c. 10% by focusing on mainstream/economy brands and relatively uncontested regions. Its market entry catalyzed major industry consolidation, and few if any suitable acquisition opportunities remain.
Figure 143: Nigerian breweries and regional market sizes
Niger Chad N Sokoto Lake Chad
Katsina Jigawa Zamfara Yobe Borno
Kano
Kebbi
Bauchi Gombe Benin Kaduna
Niger
Adamawa Plateau
Abuja Kwara Nassarawa
Oyo Cameroon
Taraba Osun Ekiti Kogi Regional beer market size Benue 0.5m HL
Ogun Ondo 3m HL
Lagos Enugu <5m HL Edo >5m HL Ebony >5.5m HL Anambra Cross River Abia Nigerian Breweries (7 plants) Golden Guinea Breweries (1 plant) Delta Imo Nigerian Breweries - (1 malt plant) Jos International Breweries (1 plant) Guinness Nigeria (3 plants) Consolidated Breweries (2 plants)
Bayelsa Rivers Akwa SABMiller (3 plants) Champion Breweries (1 plant) lbon Gulf of Guinea International Beer & Beverages (1 plant) Edo Breweries (1 plant)
Life Breweries (1 plant) Standard Breweries (1 plant)
Premier Breweries(1 plant) Benue Breweries (1 plant)
Source: Deutsche Bank, company reports
Deutsche Securities (Pty) Ltd Page 71
4 February 2015 Beverage Beer
Beer is expensive in Nigeria, for now The duopoly has used its position to establish a pricing umbrella, which gave SABMiller room to enter. Over the last decade, pricing has been above inflation (Figure 144), which has resulted in a price to consumer circa 40% above the African norm and Cameroon next door.
Figure 144: Nigeria pricing relative to inflation 2003-2012 Figure 145: Nigeria pricing vs Cameroon
140 $1.80 60
Per capita consumption ltr (population Guinness Nigeria Pricing Beer shareof alcohol $1.60 Nigeria: 9% 130 Heineken Nigerian 48.7 50 Breweries Pricing $1.40 Cameroon: 45%
Inflation $1.20 40
120 beer ml
500 $1.00 30 110 $0.80
$0.60 19.3 20 2003 index= 100 index= 2003 100 US$ price of a a of price US$ $0.40
10 15 $0.20 90 +) $- 0 Nigeria Cameroon 80 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Price of beer (left axis) PCC 15+ (right axis)
Pricing and inflations equalized on US$ basis Source: Deutsche Bank estimates, companies reports, Plato Logic Source: Deutsche Bank estimates, Plato Logic, Company reports, World Bank
SABMiller’s entry stimulating growth SABMiller entry into Nigeria in 2008 capped a 15-year process of finding an entry point. The country has 79 registered breweries, many of them built before 1990, and fewer than 20 operational. After losing to Heineken in attempting to acquire Sono Breweries, SABMiller took the plunge by purchasing Pabod Brewery in Port Hartcourt. Not a place for the faint hearted, but for many SABMiller expats who previously were stationed in Angola, everything is relative.
With the Pabod brewery barely being held together, SABMiller subsequently built a new plant in Onitsha and added the listed International Breweries to its portfolio as part of the renewal of the Castel strategic alliance.
Given the established presence of the two international brewers, SABMiller’s entry strategy in 2008 was centered around mainstream and economy brands and in regions outside of the major beer markets. Though its Hero Lager brand is notionally priced 30% below the mainstream Star, on a relative Africa basis, beer is expensive in Nigeria.
Page 72 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The success of this entry strategy where its market Figure 146: Figure 147: Nigeria pricing relative to Africa share (SABMiller plus that of Castel) has since increased from around 3% to c. 10% is testimony of the $250 30% opportunity presented by this white space. It helps that 25% $200 Diageo’s Harp Lager has been the primary share donor. 20% $150 We don’t see SABMiller’s entry into Nigeria as 15% destroying value. Rather, we believe it is the impetus $100
required to stimulate growth. The recent amalgamation 10% Net Revenue per Hl (US$) Hl per Revenue Net
$50 revenue net on margin EBIT of Heineken’s breweries (Nigeria and Consolidated) has 5% also put Heineken in the right position to stimulate the value portfolio. Its value brand 33 Export has strong $0 0% Africa average Nigerian breweries Guinness Nigeria positive national brand awareness and distribution. 2012 2012 Net revenue/Hl (left axis) EBIT Margin (right axis)
Heineken well positioned with expanded control Source: Deutsche Bankestimates, Plato Logic, Company reports Recently, approval has been granted in Nigeria to merge Heineken’s majority owned subsidiaries, Nigerian Breweries and Consolidated breweries. With the latter more focused on value brands such as 33 Export, which has national brand awareness, we see this as an opportunity to stimulate growth in the market in which it holds 70% market share.
Pricing has been historically high in Nigeria – almost 40% higher than in neighboring Cameroon and with above-inflation price increases over the last decade. Overall, we see both Heineken and SABMiller winning long term in a market that has yet to reach its potential.
Figure 148: Nigerian Breweries EBITDA in US$ Figure 149: Nigerian breweries price mix in US$
600 34% 40%
33% 500 30% 32%
400 31% EBITDA margin 20%
30% 300 10% 29%
200 28% 0% 2005 2006 2007 2008 2009 2010 2011 2012 EBITDA (USDm) EBITDA 27% 100 -10% 26%
0 25% -20% 2011 2012 2013 Volume Implied price mix
Source: Deutsche Bank, company reports Source: Deutsche Bank estimates, Plato Logic, company reports
Deutsche Securities (Pty) Ltd Page 73
4 February 2015 Beverage Beer
Key market growth projections
Figure 150: Democratic Republic of Congo Figure 151: Tanzania
18000 35.0 16000 40.0 Per Capita Consumption (pop 15+)(pop Consumption Per Capita Volume 15+)(pop Consumption Per Capita Volume 16000 30.0 14000 35.0 PPC 15+ 2015-2025DBe CAGR PPC 15+ 2015-2025DBe CAGR 14000 Volume: 12% 12000 Volume: 13% 30.0 PCC: 9% 25.0 PCC: 8% 12000 2005-2015DBe CAGR 2005-2015DBe CAGR Volume: 10% 10000 Volume:6% 25.0 10000 PCC: 6% 20.0 PCC: 3% 1995-2005 CAGR 8000 1995-2005 CAGR 20.0 8000 Volume: 6% 15.0 Volume: 6% PCC: 3% 6000 PCC: 3% 15.0
6000 Volume ('000Hl) Volume Volume ('000Hl) Volume 10.0 4000 4000 10.0 2000 5.0 2000 5.0 0 0.0 0 0.0
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Figure 152: Uganda Figure 153: Kenya
16000 40.0 14000 40.0 Per Capita Consumption Per (pop 15+)CapitaConsumption Volume 15+)(pop Consumption Per Capita Volume 14000 35.0 12000 35.0 PPC 15+ 2015-2025DBe CAGR PPC 15+ 2015-2025DBe CAGR Volume: 15% Volume: 10% 30.0 12000 PCC: 6% 30.0 10000 PCC: 7% 2005-2015DBe CAGR 2005-2015DBe CAGR 10000 Volume:9% 25.0 1995-2005 CAGR Volume:6% 25.0 PCC: 7% 8000 Volume: 0% PCC: 3% PCC: -3% 20.0 8000 1995-2005 CAGR 20.0 Volume: 10% 6000
6000 PCC: 7% 15.0 15.0 Volume ('000Hl) Volume
Volume ('000Hl) Volume 4000 10.0 4000 10.0 2000 5.0 2000 5.0 0 0.0 0 0.0
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Figure 154: Ethiopia Figure 155: Mozambique
14000 18.0 9000 45.0 15+) (pop Consumption Capita Per Volume 15+)(pop Consumption Per Capita Volume 8000 40.0 12000 16.0 PPC 15+ 2015-2025DBe CAGR PPC 15+ 2015-2025DBe CAGR Volume: 11% 14.0 7000 Volume: 13% 35.0 PCC: 6% PCC: 8% 10000 2005-2015DBe CAGR 2005-2015DBe CAGR Volume:10% 12.0 6000 30.0 1995-2005 CAGR Volume:7% PCC: 7% 8000 1995-2005 CAGR 10.0 5000 Volume: 5% PCC: 6% 25.0 Volume: 7% PCC: 3% PCC: 4% 6000 8.0 4000 20.0 3000 15.0
6.0 ('000Hl) Volume Volume ('000Hl) Volume 4000 4.0 2000 10.0 2000 2.0 1000 5.0 0 0.0 0 0.0
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Page 74 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Population drives staples growth, and African beer
Global beer growth low compared to staples In beer, using our bottom-up approach looking at 194 markets, we have projected a global volume growth rate of 1.7% per annum over the next decade. This is fairly anemic compared the rest of our consumer staples universe. In our note Emerging Exposure (24 March 2014), we analyzed 22 categories top down, with beer demonstrating only 1.5% volume growth in selected EM.1 Unlike shampoo and Coca Cola, with population being a core driver of growth, beer will not benefit from the vast growth that is expected in the Islamic markets of Bangladesh, Pakistan, and Indonesia. Beer has also fully fulfilled its potential in the EM of Eastern Europe.
Figure 156: Medium-term staples growth Figure 157: Staples per cap EM volume growth
12% 10.0% Tobacco: 6.3%; volume -3% 10% price/mix +9.6% 8.0% Per Cap EM volume Growth 8% 6.0% 6%
4% 4.0%
2% 2.0% 1.5%
0%
0.0%
IMF
PBF
Beer Diary
-2% CSDs
Vodka
IMF
Coffee
PBF
Whisky
Beer
Diary
Yoghurt
Air Care Air
CSDs
Tobacco
Pet Care Pet
Vodka
Auto DW Auto
Coffee
Shampoo
Skin Care Skin
Whisky
Bot.Water Chocolate
Ice Cream Ice -2.0%
Yoghurt
Deodorant
Pers. Care Pers.
Air Care Air
Tobacco
Pack. Food Pack.
Pet Care Pet
Home Care Home Auto DW Auto
-4% Shampoo
Skin Care Skin
Bot.Water
Chocolate
Ice Cream Ice
Deodorant
Pers. Care Pers.
Pack. Food Pack. Home Care Home Per Cap EM volume Growth EM price/mix per unit (US$) -4.0%
Source: Deutsche Bank estimates, Euromonitor Source: Deutsche Bank estimates, Euromonitor
Africa, however, works favorably for beer Africa, however, should benefit. We expect Africa volume growth of 8% per annum. Being Africa, this will likely not be a smooth line.
Figure 158: Beer volume CAGR by decade Figure 159: Drivers of beer volume growth to 2025
1995-2005 2005-2015 2015-2025DBe 9% 8% 9.0% 7.8% 7% 8.0% 6% 3.6% 7.0% 5% 6.0% 4% 5.0% 3% 4.0% 2% 4.2% 2.7% 2.8% 3.0% 1% 1.4% 0.5% 1.7% 0.6% 0.6% 1.0% 0.5% 1.7% 0% 0.4% 0.0% 0.0% 2.0% 1.6% -0.2% -0.6% -0.2% 1.2% -1% 1.0% 0.5% 0.3% 0.4% -2% 0.0% Global Asia Australasia Eastern SS Africa Latin North Western Global Asia Australasia Eastern SS Africa Latin North Western Europe America America Europe -1.0% Europe America America Europe Per Capita Consumption Population -2.0%
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
1 In our note Emerging Exposure published on 25 March 2014, we analysed 22 categories across 21 Emerging Markets ranging from shampoo to pet care top down
Deutsche Securities (Pty) Ltd Page 75
4 February 2015 Beverage Beer
Over half the growth in Africa should be driven by population growth, the remainder by per capita consumption growth.
A population boom in the right cohort Population growth and leading GDP growth rates put Africa in the right zip code for consumer staples. It is particularly attractive for beer, as the population boom is occurring in the right age cohort and the phase of GDP growth positively impacts beer disproportionally
Figure 160: Africa to lead global population growth… Figure 161: Africa regional population growth
12 1.75 1.50 10 1.25 8 1.00 6 0.75
4 0.50 Population(Billion)
2 population Africa (Billions) 0.25 0.00
0
2010 1950 1960 1970 1980 1990 2000
2020E 2030E 2040E 2050E 2060E 2070E 2080E 2090E 2100E Asia Africa Rest of world South North Central East West
Source: Deutsche Bank, World Bank Source: Deutsche Bank, World Bank
More relevant for beer is the 20-35 year-old cohort, the age group when people generally establish the habit of drinking beer, entrench brand choices, and drink ¾ of their lifetime beer consumption.
Figure 162: Africa population age pyramid Figure 163: Population age profile 2012 and 2025 2012 2025 3.0% 2.7%
80+ 2.0%
70-79 0.9% 1.0% 0.4% 60-69 0.2% 50-59 0.0% -0.2% 40-49 -1.0% 12.5% 30-39 11.8% -2.0% -1.6% 20-29 17.0% 17.2% -1.9%
10-19 -3.0%
00-09 -3.3% -4.0% Russia China Japan Brazil Australia USA Mexico Africa (sub)
Source: Deutsche Bank, World Bank. Sub Saharan Africa Source: Deutsche Bank, World Bank
In Africa, this key age key cohort should grow on average 2.5%, or 6 million new consumers per year, with Uganda, Ethiopia and the Democratic Republic of Congo enjoy an even greater population dividend. That is the equivalent of adding another Germany of beer drinkers in the right age group every year.
This age group should remain a stable set of the population. In contrast to Russia, which should see the 20-30 age group decline from 17% to 10% of the population over the next decade, Africa should maintain its share at 17%.
Page 76 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
in sub Sahara Africa to Africa 2025 Sahara sub in
s 35 year 35old year -
Annual growth of growth 20 Annual
: % % % % % % % 0 5 5 0 0 5 0 164 ......
0 1.0% 0 1 3 2 2 3.5% 4.0% 1 0.5%
- -
% CAGR of new new of CAGR % year olds to to olds year 35 - 20 2025 Figure Figure Source: Deutsche Bank, World Bank World Bank, Deutsche Source:
Deutsche Securities (Pty) Ltd Page 77
4 February 2015
Beverage Beer
Plenty of room in per caps
Globally, not much growth left On a global level, per capita consumption of beer is hitting its peak, with most developed markets hitting decline as health concerns grow and other alcohol categories become more appealing. In our forecasts, we estimate per capita consumption to globally increase 2 liters per person over the next 10 years.
Figure 165: Per capita beer consumption (in liters for population 15+)
120
100 96 88 89 82 78 77 80 71 70 69 68
60
37 39 40 35 25 23 21 20
0 Global Asia Australasia Eastern SS Africa Latin North Western Europe America America Europe
2015DBe 2025DBe
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Figure 166: Per capita beer consumption 2015DBe 2025DBe CAGR Global 37 39 0.4% Asia 23 25 0.6% Australasia 78 77 0.0% Eastern Europe 82 88 0.6% SS Africa 21 35 4.4% Latin America 71 70 -0.2% North America 96 89 -0.6% Western Europe 69 68 -0.2% Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Most developed markets have seen declines in per capita consumption since their peak year. Belgium peaked in 1974, the UK and USA in 1981. Western Europe and the Nordic regions have seen on average a total decline of 20% in per capita consumption over the past two decades. Certain places in Central Europe have an entrenched beer culture, so per capita consumption has matched and often exceeded developed markets.
Chinese beer consumption has grown strongly (per caps compounding at 23% pa) over 15 years off an extremely low base. Per caps of around 45 liters are hitting the normalized rates of developed Asiatic markets such as Japan at 55 liters.
Page 78 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Africa the last bastion of per capita growth There is plenty of growth left to increase per capita consumption as beer takes share from illicit alcohol, and we have making conservative estimates of the potential based on cultural, religious and physical limitations in our growth model.
Figure 167: African markets per capita consumption versus potential
120 Long term per capita consumption potential 100 Per Capita Consumption Brazil 2015 PCC 2015DBe USA 2015 PCC 80
60 Japan 2015 PCC China 2015 PCC 40
20 Per Capita Capita Perconsumption (populationaged 15+)
0
Togo
Chad
Benin
Kenya
Bissau
Ghana
Gabon
Eritrea
Liberia
Angola
-
Guinea
Nigeria
Zambia
Malawi
Uganda
Gambia
Senegal
Burundi
Lesotho
Rwanda
Ethiopia
Namibia
Tanzania
Morocco
Mauritius
Botswana
Swaziland
Zimbabwe
Cameroon
Congo, Rep. Congo,
Madagascar
South South Africa
SierraLeone
South South Sudan
Cote d'Ivoire Cote
Burkina FasoBurkina
Mozambique
Guinea
Equatorial Guinea Equatorial Congo, Dem. Congo, Rep.
Central African Central Republic Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Depending on the market, we see potential per capita consumption ranging from above 90 liters in markets such as South Africa and Burundi to lower estimates of 45 liters in Nigeria – all below the current consumption experienced in Brazil and the US.
The role of Islam in Africa will also be a limiting factor, but not to the same extent as with the more stringent practices in the Middle East. Nigeria is expected to add more than 70 million people by 2025; half the population of Nigeria is Muslim, which officially rejects the consumption of alcohol – though interpretations do vary by consumers on the ground.
Deutsche Securities (Pty) Ltd Page 79
4 February 2015
Beverage Beer
Similar jump in consumption… in the last century (or two) South Africa saw a sharp jump in per capita consumption from 1960 to 1990. Pricing below inflation, the removal of Apartheid legislation prohibiting beer consumption by the black population in 1961, and the urbanization and concentration of mining compounds stimulated growth.
Figure 168: South Africa volume and per capita growth 1960-1990
30,000 140.0
Volume ('000hl) 1980-1990 CAGR Volume: 7%
120.0 (all population) Consumption Per Capita 25,000 PCC 15+ PCC: 4%
1970-1980 CAGR 100.0 20,000 Volume: 10% PCC: 7% 1960-1970 CAGR 80.0 15,000 Volume: 11% PCC: 8%
60.0 Volume ('000Hl) 10,000 40.0
5,000 20.0
- 0.0 1961 1966 1971 1976 1981 1986
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Reaching further back, the United States saw strong expansion of the beer markets following the Civil War. Two innovations stimulated the acceleration of beer consumption. In 1872, Anheuser Busch started shipping pasteurized beer. In 1879, refrigerated rail cars allowed for beer to leave the confines of St. Louis.
Figure 169: US volume growth and per capita consumption 1865-1895
45,000 60.0
Volume (Hl) 1885-1895 CAGR 40,000 Volume: 6% PCC (All) PCC: 4% 50.0 (all Per population)Consumption Capita 35,000 1875-1885 CAGR 30,000 Volume: 7% 40.0 PCC: 5% 25,000 1865-1875 CAGR Volume: 10% 30.0 PCC: 7%
20,000 Volume ('000Hl) 15,000 20.0
10,000 10.0 5,000
- 0.0 1865 1870 1875 1880 1885 1890 1895
Source: Deutsche Bank estimates, Beer Institute
From 1865 to 1895, growth was driven by both population growth and per capita consumption increases. With the hindsight of prohibition, the irony is that the temperance movement favored beer over other types of illicit alcohol.
Page 80 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 170: Per capita consumption in Africa, population 15+ in liters
3
3 4 12 8 11 3 15 19 7 8 6 17 12 5 6 49
17 >125l 138 84 19 21 100-125l 14 31 90-100l 14
80-90l
70-80l 99 4 60-70l 17
50-60l 16 22 9 40-50l 89 42 30-40l
20-30l 32 82 10-20l 31
<10l
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank
Deutsche Securities (Pty) Ltd Page 81
4 February 2015
Beverage Beer
Affordability remains key
How much do you have to work for your beer? As we have stated previously, blocking the entry into the beer category is affordability. It is a question of how long one has to work for a beer. The amount of work required for a beer is strongly correlated to the per capita consumption in a market.
Figure 171: Minutes worked for a 50cl beer in 134 markets
120
100
80
60
40 R² = 0.5973
Per capita consumption 15+ consumption capita Per 20
0 0 200 400 600 800 1000 1200 1400 Minutes worked for a beer Adjusted to exclude Islamic nations. Based on national income and ILO standards for working hours. Source: Deutsche Bank, World Bank, Euromonitor, Plato Logic,, ILO
As per Figure 172, at around 120 minutes, beer consumption in market hits an 120 and 30 minutes of work inflection point. Consumption accelerates as more consumers within a market for a beer are key inflection enter the category and more occasions become relevant to beer moments. points for per capita beer growth Figure 172: Minutes worked for a 50cl beer - inflection points
120
100 Inflection points at 30 and 120 minutes 80
60
40
Per capita consumption 15+ consumption capita Per 20
0 0 50 100 150 200 250 Minutes worked for a beer Adjusted to exclude Islamic nations. Based on national income and ILO standards for working hours. Source: Deutsche Bank estimates, World Bank, Euromonitor, Plato Logic, World Bank , ILO
Page 82 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
At 30 minutes, we see another inflection point of acceleration as habits are entrenched and wider portfolio choices become an option, including premium beers.
Share of population that can afford a beer within a market When looking within Africa, the share of the population that can afford a beer (e.g. work less than 2 hours for a beer) correlates strongly to per capita consumption.
Figure 173: Proportion of population within a market that can afford a beer
120.0
100.0 Angola South Africa 80.0
60.0
Botswana 40.0
(15+ population) (15+ Burundi
20.0
Per capita Perbeer consumption Kenya Ghana 0.0 0 10 20 30 40 50 60
R² = 0.5191 % of the population who work<2 hours for a beer (500ml)
Source: Deutsche Bank estimates PovCal. 32 sub-Saharan African markets
Figure 174: Share of adults who can afford a beer in Africa
60
50 Share of adults who work less than 2 hours to buy and afford a 500 ml beer 40
30
20
10 % who can afford a 500ml beer 500ml a afford can who %
0
CAR
Togo
Chad
Benin
Africa
Kenya
Gabon Ghana Liberia
Malawi
Angola
Nigeria
Guinea
Zambia
Burundi
Uganda
Lesotho
Ethiopia
Rwanda
Namibia
Tanzania
Botswana
Swaziland
DR Congo DR
Cameroon
South Africa South
Madagascar
Cote d'Ivoire Cote
Congo, Rep. Congo,
Sierra Leone Sierra
Mozambique Gambia, The Gambia, Burkina Faso Burkina Source: Deutsche Bank estimates, PovCal
Deutsche Securities (Pty) Ltd Page 83
4 February 2015
Beverage Beer
Figure 175: How long do you have to work for a beer, %of people in market <30minutes <2hours <4hours >4hours Nigeria 1.5% 5.6% 19.6% 73.3% DRC 0.5% 1.9% 7.3% 90.4% Tanzania 2.0% 7.1% 29.3% 61.7% Uganda 4.0% 12.1% 31.6% 52.2% Kenya 4.6% 13.0% 30.7% 51.7% Ethiopia 1.3% 6.4% 34.3% 58.0% Mozambique 1.6% 6.1% 22.8% 69.5% Source: Deutsche Bank estimates, PovCal
Figure 176: How long do you have to work for a beer, country average
Source: Deutsche Bank estimates, World Bank, Euromonitor, Plato Logic, World Bank , ILO
Page 84 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Pricing below inflation drives growth, adds new drinkers, fuels consumption As already discussed, pricing below inflation in South Africa over a 20-year period halved the price of beer in real terms and quintupled per capita consumption. Because of the high capital intensity of brewing, the operational leverage driven by the resultant volume growth doubled margins despite pricing below inflation.
Figure 177: South Africa real pricing and alcohol share Figure 178: South Africa per capita growth 1961-2001
120 Beer share of 70% 30,000 140.0 alcohol in 2001 Volume ('000hl) 1980-1990 CAGR 59% Volume: 7%
60% (all population) Consumption Per Capita 100 PCC 15+ 120.0 Beer share of Absolute Alcohol 25,000 PCC: 4%
50%
(excl unrecorded) 1970-1980 CAGR 100.0 80 20,000 Volume: 10% PCC: 7% 40% 1960-1970 CAGR 80.0 60 15,000 Volume: 11% 30% PCC: 8% 60.0
40 Volume ('000Hl) Real beer price to CPI 20% 10,000 Beer share of Beer share of AA 40.0 20 alcohol in 1973 18% -0.98 correlation 10% 5,000 Real beer price relative to CPI (CPI =100) (CPI CPI to relative price beer Real 20.0 0 0% - 0.0 1961 1966 1971 1976 1981 1986
Source: Deutsche Bank estimates, company reports, ACNielsen Source: Deutsche Bank estimates, company reports, AC Nielsen
In West Africa, when contrasting Nigeria and Cameroon we see two markets with similar profiles, both also including a large share of Muslims within the population, who presumably limit alcohol consumption. Per capita consumption in Cameroon, however, is 2.5x that in Nigeria. For years, the duopoly of Heineken and Diageo has priced at or above inflation – with prices masked by the inflation environment. In contrast, in Cameroon pricing is more difficult. The CFA currency is pegged to the Europe, with inflation in line with European norms. Sensible pricing by Castel’s Brasseries du Cameroun over the last 20 years has resulted in a price point 30% below that in neighboring Nigeria, stimulating growth.
Figure 179: Nigeria and Cameroon pricing and PCC Figure 180: Uganda and Zambia per capita consumption
$1.80 60 20
Per capita consumption ltr (population 15+) Beer shareof alcohol Benefiting from an $1.60 18 excise reduction, Nile 18 Nigeria: 9% Breweries launches 17 48.7 50 $1.40 Cameroon: 45% 16 Eagle Lager at a 30% discount to mainstream
$1.20 40 14 ml beer ml
500 $1.00 12 30 10 $0.80 10
$0.60 19.3 20 8 8 US$ price of a a of price US$ $0.40 6 Zambian government reduces beer 10 excise from 75% to 60% in 2009 $0.20 4 and 60% to 40% in 2010 to combat Per Capita consumption (litres 15+) (litres consumptionCapita Per illicit alcohol. In 2014 raised back to Uganda $- 0 2 60% Nigeria Cameroon Zambia 0 Price of beer (left axis) PCC 15+ (right axis) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Deutsche Bank estimates, Plato Logic, company reports, World Bank Source: Deutsche Bank, Plato Logic, World Bank
Both Uganda and Zambia have experienced similar price reductions in the last decade, driven by initiatives lowering the excise component of beer. The Brewers tend to report revenue, net of excise. Yet excise is a real cost of beer borne by the consumer, which can be managed as seen in those two markets.
Deutsche Securities (Pty) Ltd Page 85
4 February 2015
Beverage Beer
In Uganda, the introduction of Eagle lager by SABMiller’s Nile Breweries, a “We aim to halve the price of beer primarily made with local sorghum instead of barley, received an excise beer in Africa.” reduction from 60% to 20%, effectively reducing the consumer price 30%. The CEO SABMiller Africa reduction in excise has been sustainable as the company developed over February 2011 12,000 farmers to supply the brewery and ensured and guaranteed the government a set excise amount. Per capita consumption in Uganda has more than doubled in the last decade as a result. Diageo attempted a similar initiative in Kenya with the Senator brand. However, as Kenya received 0% excise and no direct financial benefit, it was not difficult for the government to reverse its decision, which it did in 2013.
In Zambia, SABMiller’s Zambian Breweries argued for an excise reduction from 75% to 60% as a means to combat illicit alcohol. The effective reduction led to a consumer discount of 30%, increasing per capita consumption to 17litres per capita. In 2014, the government partially reversed its decision. We wait to see the long-term impact or whether the company is able to convince the new government post the February elections of its view.
SABMiller has an active program to halve the price of beer, through pricing, transactional packs, new products or with help from the governments, as above. By halving the price of beer, on our estimates, the share of adults in Africa who can afford a beer moves from 15% to 40%.
Pricing below inflation results in more consumers who can afford a beer With only 15% of the African population able to afford a decent beer, in Figure 181 and Figure 182 we estimate the impact on price reduction.,
Figure 181: Cheaper beer, more people can afford Figure 182: Consumers entering beer at different price discounts 45% 60% 39.6% 40% 35.2% 50% 35% 31.3% 40% 30% 28.0% 25.2% 25% 22.8% 30% 20.6% 18.8% 20% 17.2% 15.8% 20% 500ml beer 500ml 14.6% 15% 10% 10%
5% 0% % of populatiion in Africa who can afford a a afford can who Africa in populatiion of % % of population who can afford a 500ml beer a 500ml afford can who population of % Nigeria DRCongo Tanzania Uganda Kenya 0% Real beer price points relative to current 0 -5% -10% -15% -20% -25% -30% -35% -40% -45% -50% Real price discount for a 500ml beer current @-10% @-20% @-30% @-50%
Source: Deutsche Bank estimates, PovCal Source: Deutsche Bank estimates, PovCal
Halving the price of beer, as South Africa did over a period of two decades, would enable 40% of African consumers to enter the beer category on a regular basis.
Page 86 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Impact of GDP growth on per capita growth
The long-term correlation between real growth in GDP per capita and beer PCC growth implies four income levels where behavioral patterns in relation to beer typically change. It should be noted that there are regional differences in terms of the correlation, which are attributable to factors such as culture, urbanization, logistics, taxation and level of market development.
Figure 183: Region per capita beer consumption and GDP 1991-2013
90.0 80.0 70.0 60.0 50.0 40.0 Beer PCC thresholds: Per capita GDP US$1,000 - 5,000 ===> Exponential demand growth 30.0 Per capita GDP US$5,000 - 10,000 ===> Slowing demand growth Per capita GDP US$10,000 - 15,000 ===> Mature demand, flattish PCC 20.0
Annual PCC beer (litres) beer PCC Annual Per capita GDP US$15,000 ===> Flat to declining PCC 10.0 0.0 0 5,000 10,000 15,000 20,000 25,000
GDP per capita (US$, 1987 constant)
Africa North America Latin America Western Europe Asia Eastern Europe
Source: Deutsche Bank estimates, Plato Logic, World Bank
Given its emerging status, two income thresholds are of particular relevance to Africa:
GDP per capita breaking above US$1,000 From around this income level consumers typically start to adopt formal packaged goods. They also switch rapidly from traditional alcohol beverages, such as sorghum beer, to clear beer (i.e. bottled beer). Beer volume growth typically accelerates to double-digit YoY growth percentages, but these growth rates may be volatile. The bulk of African countries, i.e. we estimate 41, fall into this category.
GDP per capita breaking above US$5,000 From around this income level, branding and product differentiation become key drivers for brewer revenue growth relative to consumption (volume) growth. Spirits then also start to take share from beer. Furthermore, PCC is impacted by increased consumer health awareness and unfavorable demographics. The rate of beer PCC growth starts to rapidly slow to levels of around low- to mid-single-digit percent YoY. Although 12 countries from Africa presently fall into this category, they are typically small countries except for South Africa and Congo Brazzaville.
The real (vs. nominal) GDP multiplier to beer PCC for Africa has been 1.7x in the 1991-2013 period. Following from the abovementioned, as economic growth takes off the multiplier reduces, as does the strength of correlation (R- square).
Deutsche Securities (Pty) Ltd Page 87
4 February 2015
Beverage Beer
In spirits developed markets volume growth is at best holding up with real GDP growth. In emerging markets spirits volume growth also typically benefits from a multiplier effect on GDP growth. We estimate for Diageo that a 1% change in real GDP growth typically drives 3% volume change in Scotch. This makes Diageo’s growth performance in emerging markets slightly more cyclical.
Figure 184: Multiplier effect of GDP and beer volume growth 1991-2013 Coefficient R-square Africa 1.7 0.63 Latin America 1.1 0.31 Eastern Europe 0.8 0.52 Asia 0.4 0.05 Asia ex-China 0.6 0.30 China 2.1 0.54 Western Europe 0.3 0.22 North America 0.3 0.17 Source: Deutsche Bank estimates, Plato Logic, World Bank
Given that Africa, albeit from a lower base, has been the fastest-growing region in the world, this makes it also the fastest-growing beer region.
Figure 185: Sub-Saharan Africa leading GDP growth since 2000
220 Sub- Saharan Africa
200
180
160
140
120
100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Major advanced economies (G7) Euro area Emerging and developing Europe ASEAN-5 Latin America and the Caribbean Middle East and North Africa
Source: Deutsche Bank, IMF World Economic Outlook 2014
Page 88 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 186: Strong correlation between GDP per capita and beer PCC in Africa
1. Strong correlation between beer PCC 80.0 Gabon and GDP per capita 2. Some low-income countries already 70.0 South Africa sizeable beer markets 60.0 Namibia Congo Brazzaville 50.0
40.0 Cameroon Botswana 30.0 Burundi Mauritius 20.0
Annual PCC beer (litres) beer PCC Annual Zimbabwe Nigeria Tunisia 10.0 DRC Algeria 0.0 -1,000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Ethiopia GDP per capita (US$, 1987 constant) Bubble size = Total country beer market volume
Source: Deutsche Bank estimates, Plato Logic, World Bank
Figure 187: Big population, low income countries offer the best long-term growth potential…
80.0 Combination of big populations with low PCC 70.0 ==> major long-term growth South Africa Gabon potential for beer 60.0 Congo Brazzaville Namibia 50.0
40.0 Botswana 30.0 Cameroon Burundi Mauritius 20.0 Nigeria Tunisia Annual beer PCC (litres) PCC beer Annual 10.0 Egypt Morocco Algeria 0.0 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 -10.0 GDP per capita (US$, 1987 constant) Bubble size = Country population
Source: Deutsche Bank estimates, Plato Logic, World Bank
Figure 188: …lower-end scale of above graph expanded
35.0 Cameroon 30.0
25.0
20.0 Burundi Lesotho Mozambique Nigeria Swaziland Zimbabwe 15.0 Kenya Rwanda DRC Zambia Tanzania 10.0 Ethiopia Chad Ghana 5.0 Mali Uganda Côte d'Ivoire Senegal
Annual beer (litres)PCC Annual Guinea 0.0 0 100 200 300 Niger400 500 600 700 800 900 1,000 -5.0 Burkina Malawi Madagascar Faso -10.0 GDP per capita (US$, 1987 constant) Bubble size = Country population
Source: Deutsche Bank estimates, Plato Logic, World Bank
Deutsche Securities (Pty) Ltd Page 89
4 February 2015
Beverage Beer
Taking share from the bottom of the pyramid
To the vast majority of the world’s consumers, beer is a luxury product and an entry point to commercially branded goods. Unlike most staples, beer serves an already established need provided by alcohol and offers a safer and more hygienic choice vs. illicit alcohol. The barrier for consumers to enter the category is a factor of price and income.
Beer is expensive relative to alternatives Beer is expensive, especially compared to alternatives in the illicit alcohol area. Those alcohol types that do tend to be commercially priced below beer often do not pay the full complement of taxes or follow regulations to the letter. As indicated in Figure 189, the pricing ladder in alcohol is logarithmic. Unfortunately, for most consumers, their income growth is not.
Figure 189: Tanzania pricing ladder (mainstream beer =100) Price index to absolute alcohol equivalent Tanzania example 5000 Premium scotch Johnny Walker Blue 2000 Standard scotch Johnny Walker Black 500 Entry level international scotch Johnny Walker Red 300 Local entry level international spirit Jameson’s 250 Imported international premium Heineken 160 Locally brewed international premium Peroni 140 Taxed local spirits Konyagi 130 Regional premium beer Castle Lager 120 Local premium beer Ndovu/Tusker 110 Mainstream beer in premium pack Kilimanjaro one way 100 Mainstream beer Safari Lager 80 Economy barley beer Kibo lager 70 Local adjunct clear beer Eagle Extra 60 Non-tax paid local spirits IMFL sachets 50 Commercial sorghum beer Chibuku 30 illicit sorghum beer Busaa 20 illicit fruit wine Urwaga 10 illicit distilled alcohol Chang'aa
Source: Deutsche Bank estimates, company report, market visits
The movement between alcohol categories requires a multiple of one’s income. The gap between illicit spirits and mainstream beer has a multiple of two to three times.
A world of non-commercial alcohol Almost every market has a form of non-commercial alcohol produced locally. Often, these are rooted in local traditions and norms and very much priced below beer.
North America has had Rye Whiskey and Gin historically in the Appalachians; Local, often illicit alcohol Latin America is known for its distilled spirits made from sugarcane such tends to be priced Aquardiente or Cachacha. Russia is known for its Samogon Vodka. Eastern significantly below beer and Southern Europe have their various fruit brandies such as Palinkas; India has palm wine in the form of Arrack and its own form of neutral spirit from molasses collectively known as Indian Made Foreign Liquor; and Africa has a multitude of concoctions from fruit wines to local millet, as seen in Figure 190.
Page 90 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 190: Home-made beer in Africa
Source: Deutsche Bank, personal collection.
The size of the illicit alcohol market is a function of national income. In Figure 191, we reviewed 156 markets and found illicit unrecorded alcohol most prevalent in countries with low GDP per capita. The outliers with high illicit alcohol compared to their relatively high income such as Iraq, Turkmenistan and Botswana tend to have restrictions on commercial alcohol products - perhaps an unintended consequence of public policy.
Figure 191: Unrecorded/illicit alcohol as a function of income
100% 90% 80% 70% 60% 50% 40% 30% 20%
10% Informal/illicit Informal/illicit alcohol as % a of total 0% 0 2500 5000 7500 10000 12500 15000 GDP per capita USD
Source: Deutsche Bank estimates, WHO, World Bank
Deutsche Securities (Pty) Ltd Page 91
4 February 2015
Beverage Beer
Africa has the largest addressable market for alcohol The biggest market for illicit and non-commercial alcohol is sub-Saharan Africa. The alcohol drunk in most of these markets is long alcohol drinks with alcohol content similar to lager beer of 3% to 6%. On average, beer is less than 25% of alcohol consumption. The remainder is illicit alcohol priced below beer.
Figure 192: Beer share of alcohol in African markets
70%
60%
50% Brazil and USA level
40%
30%
20% Beer shareBeerof Alcohol 10%
0%
Mali
Togo
Chad
Niger
Benin
Kenya
Bissau
Ghana
Gabon
Liberia
Angola
-
Algeria
Guinea
Nigeria
Zambia
Malawi
Uganda
Gambia
Senegal
Lesotho Burundi
Rwanda
Ethiopia
Namibia
Tanzania
Mauritius
Botswana
Swaziland
DR Congo Congo DR
Cameroon
Zimbabwe
Congo Braz Congo
Cape Verde Cape
Madagascar Madagascar
South Africa South
Sierra Leone Sierra
Côte d'Ivoire Côte
Burkina Faso Burkina
Mozambique
Guinea Central African Republic African Central
Source: Deutsche Bank estimates, WHO, World Bank, Plato Logic
Recent gains for beer can be seen in Angola, where it now accounts for 65% of alcohol. Until recently, Angola was mostly a wine market - concentrated wine was primarily imported from Portugal, diluted to 12% and often mixed with Coca Cola to hide the flavor and make a local concoction named Catemba. In the last decade, the shift to beer has made Angola one of the highest per capita markets in Africa. However, in most markets from Zambia to Nigeria, illicit alcohol is more than 60% of the segment, giving beer a large addressable market.
Page 92 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 193: Beer share of total alcohol in Africa
>50% Low alcohol consumption in 45-50% North Africa, but spirits DR Congo dominate 40-45%
35-40% Beer 17% 30-35% Illicit Wine alcohol 1% 25-30% 80% Spirits 20-25% 2%
15-20%
10-15% Distilled Chan’aa and Urwaga banane beer <10% accounts for the unrecorded alcohol in n/a East and central Africa
Nigeria Zambia Beer 19% Beer Illicit Wine 9% Pito made from alcohol 3% Millet and the Gin- 89% Wine Spirits like drinks such as 1% Akpeteshie Illicit 13% dominates alcohol in Spirits Alcohol West Africa 1% 65% South Africa
Angola Other Illicit alcohol alcohol Growth in Angola Beer 26% Beer 5% has come at the 64% 39% expense of bulk wine from Spirits Portugal 17% Low priced wine in the Cape and Sorghum in theSpirits Eastern Cape and KZN 17% Wine Wine 18% 14% Share of Absolute Alcohol assuming a beer equivalency of 5% alcohol by volume Source: Deutsche Bank estimates, WHO, Euromonitor, Plato Logic
Deutsche Securities (Pty) Ltd Page 93
4 February 2015
Beverage Beer
The evolving brewing landscape
Africa brewing is no short-term game. SABMiller was established in South Africa during the Gold Rush in 1895, expanding into southern Africa not long thereafter. The fall of Apartheid saw the company expand further into Africa, and today it holds the dominant share on the continent. Heineken teamed up with Unilever in 1949, entering Nigeria in 1957. Guinness established its first brewery outside Ireland and Great Britain in Lagos, Nigeria, in 1962. Castel started its first brewery in Gabon in 1967. The results are the high barriers to entry emanating from first-mover advantage. Africa offers only a few potential M&A opportunities of material impact. Currently the only real prospective routes of corporate activity in Africa involving the brewers -the Castel family exiting and Diageo exiting the operational aspects of selling beer- would probably involve the two established brewers rather than any new entrants.
SABMiller the biggest, but Heineken catching up Africa is SABMiller’s backyard, and post-Apartheid, the company established a dominant position, particularly in east and southern Africa. Since 2001, Heineken and Castel have both gained significant volume share relative to SABMiller in Africa, inclusive of South Africa.
Figure 194: Africa volume market share
9% 11% 10% 13%
16% 17% 24% 24% Other Diageo Castel 52% 46% 36% 32% SABMiller Heineken
25% 28% 16% 20%
1995 2005 2015DBe 2025DBe
Source: Deutsche Bank estimates, Plato Logic, Company reports. Sub Saharan markets only
The changes are partially driven by M&A: Heineken has become more aggressive in outbidding SABMiller for assets, including the Sono group in Nigeria, and the Harar and Bedele breweries in Ethiopia. Castel has benefitted from the consolidation and double-digit growth in Angola; the market has doubled its volume contribution to Africa to account for an estimated 10% of volumes in 2015.
Page 94 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 195: Map of Africa
Tunisia 1.7m hl Morocco Castel 0.8m hl Castel (5)
Algeria 1.4m hl Castel (5) Egypt 1.3m hl Heineken Heineken
Senegal 0.2m hl Castel
Guinea-Bissau Mali 0.1m hl 0.2m hl Niger Castel 0.1m hl Castel Chad Guinea 0.6m hl 0.2m hl Burkina Faso 1.2m hl Castel Castel Nigeria Ethiopia Castel Sierra Leone 19.6m hl 4.4m hl 0.2m hl Cote d’Ivoire Heineken South Sudan Castel Heineken 2.1m hl Heineken Castel CAR 0.6m hl 0.2m hl SABMiller Liberia Cameroon Castel Uganda 0.2m hl 6.5m hl 3.5m hl Monrovia Castel SABMiller Breweries (3) Diageo Ghana Kenya 2.0m hl 5.0m hl Diageo (2) Benin DR Congo Diageo Rwanda SABMiller 1.0m hl 5.3m hl 1.5m hl Castel Heineken Togo Heineken Burundi 0.6m hl Equatorial Guinea Castel 1.9m hl Castel 0.2m hl Tanzania Heineken Castel 4.0m hl Malawi Gabon SABMiller 0.3m hl 1.5m hl Carlsberg Castel Angola 12.1m hl Rep. Of Congo Zambia 2.2m hl Castel 1.4m hl Heineken SABMiller Mozambique 2.4m hl SABMiller Madagascar Zimbabwe 1.2m hl 1.6m hl Castel 2015DBe Africa (SS) volume share Delta Namibia 1.4m hl Botswana 5% Namibian 0.6m hl SABMiller Breweries(1) SABMiller 24% 36% Heineken Swaziland 0.3m hl Diageo South Africa SABMiller 10% Castel 31.6m hl SABMiller Lesotho Other 0.4m hl 25% SABMiller
Significant cross holdings - SABMiller has a share in Castel operations of 20%, with the exception of Algeria and Morroco (40% share) and Angola (27.5%) - SABMiller has a 40% share of Delta Beverages in ZImbabwe - Castel has a share of SABMiller Africa of 38&, with the exception of South Africa (none). Nigeieria (49.9%) and South Sudan (20%) - Heineken in South Africa joint venture and has 42.25% with Diageo (42.5%) and Namibiian breweries (15.5%) - Diageo has a joint venure in Ghana (50% share) with Heineken (20% share)
Source: Deutsche Bank estimates, company reports, Plato Logic
Deutsche Securities (Pty) Ltd Page 95
4 February 2015
Beverage Beer
SABMiller’s 3% beer volume growth rate in Africa over the last 20 years is dragged down by South Africa. Excluding this market, SABMiller achieved 7% growth per annum.
Figure 196: Historical Africa growth rates
50000 3% CAGR 1995 7% ex-SA 45000 2005 40000 2015DBe 7% CAGR 35000 7% CAGR 30000 25000 20000 15000 10000 5000 0 Diageo Castel Heineken SABMiller
Source: Deutsche Bank estimates, Plato Logic, Company reports. Sub Saharan markets only
The relevance of South Africa can be seen in Figure 197: its contribution to African volume has almost halved. We expect Nigeria to catch up and surpass South Africa by 2030.
Figure 197: Volume by market in sub Saharan Africa
100%
33 90% markets for 33% 80% of Mozambique, 2% Mozambique, 2% Mozambique, 1% Uganda, 2% Uganda, 3% volume Mozambique, 2% Uganda, 1% Tanzania, 3% Uganda, 3% 70% Kenya, 4% Tanzania, 4% Kenya, 5% Kenya, 4% Kenya, 4% DR Congo, 4% Cameroon, 6% DR Congo, 5% 60% Cameroon, 6% Cameroon, 5% Cameroon, 5% Angola, 5% Ethiopia, 4% Nigeria 50% Ethiopia, 5% 8% Angola Nigeria 10% 14% Angola 40% 11% top ten Nigeria markets 16% 77% 30% Nigeria 17% South Africa 20% 46% South Africa 39% South Africa 26% South Africa 10% 20%
0% 1995 2005 2015DBe 2025DBe
Source: Deutsche Bank estimates, company reports, Plato Logic
Page 96 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
A moat to protect dominant positions As per Figure 198, the brewers in Africa have strong, quasi-monopolistic positions. When using the Herfindhal index of market power concentration, all of the markets would be considered highly concentrated, entrenching profitability.
For beer, the moat around profitability is deep – and even deeper in Africa. The high capital intensity of brewing and the product intrinsics of beer are difficult for a new entrant to replicate. Additionally, the emotional nature of beer creates stronger brands.
For Africa, these factors hold even truer than in developed markets. Besides the brewing paraphernalia, brewers need to develop the full supporting infrastructure from utilities to route-to-market. Water quality and reliability of power cannot be taken for granted. A new entrant cannot rely on tapping into a protected three-tier system for its distribution, such as in the US. And health concerns, too, play a role: the willingness (and high likelihood) of expatriates to contract malaria limits the talent pool that can be deployed.
Figure 198: Herfindhal index of market power in Africa
Market power/concentration >0.25 = high Market leader 0.15-0.25 = moderate Heineken <0.15= low SABMiller Castel China Diageo Poland USA Other Ethiopia South Sudan Uganda Ghana Congo, Dem. Rep. Sierra Leone Nigeria Tanzania Senegal Cameroon Liberia Botswana Zambia Angola South Africa Namibia Guinea Madagascar Benin Burkina Faso Rwanda Gabon Cote d'Ivoire Chad Swaziland Mozambique Lesotho Central African Republic Mauritius Kenya Zimbabwe Morocco Malawi Equatorial Guinea Togo Seychelles Congo, Rep. Cabo Verde Burundi 0 0.2 0.4 0.6 0.8 1 Herfindahl Index
Source: Deutsche Bank estimates, Plato Logic
We would also argue that brand loyalty is higher in Africa than elsewhere. With over 50% of personal expenditure on food and beverages (as opposed to 10% in the Netherlands, for example), the choice of beer is an expensive decision. The poverty paradox is the cost of failure. Should the beer brand choice fail in delivering against your expectations, it is unlikely you can afford another one. As result, brand loyalty is high, especially for proven, local brands with a history of delivering quality (in many categories in Africa, the latter is quite rare).
Deutsche Securities (Pty) Ltd Page 97
4 February 2015
Beverage Beer
…but don’t get too greedy There have been only three instances where a competitor has successfully entered an African market.
In 2007 in South Africa, Heineken terminated the Amstel license agreement and Heineken brand JV with SABMiller on the back of a court ruling that SABMiller’s purchase of Bavaria in Latin America constituted a change of control. SABMiller had built the Amstel brand as the premier premium brand, accounting for 8% market share. However, due to the paltry royalty arrangements, Heineken did not participate equitably in the growth of Amstel. Bringing this strong brand in-house allowed the company to build an immediate presence in South Africa. We see a similar potential situation in other African markets if SABMiller were to purchase Castel (as discussed on page 110
The other two cases of market entry can be attributed to the established players taking excessive pricing.
Following the exchange of crossholdings in 2002 with EABL, Tanzania Breweries (TBL) effectively had 90% market share. Over the next several years, the company reduced marketing, cut fixed-cost investments in sales and marketing, simplified the portfolio, and raised pricing above inflation. This created a pricing and margin umbrella for a competitor to enter. Serengeti Breweries launched in 2004, and quickly gained 20% share as TBL underinvested. We note that Serengeti did not always follow the full corporate governance guidelines, including its reluctance to fully declare the required excise payments.
Its success caused EABL/Diageo to reassess the strategic alliance and crossholding, and purchase Serengeti in 2010. Unwinding some of the corporate governance issues has caused Diageo some headaches, but it nevertheless gained an attractive foothold in the market. The reversal of strategy by TBL, including upweighted investment in sales and marketing, has subsequently accelerated growth in the market.
Similarly in Nigeria, Heineken and Diageo’s desire to raise pricing above inflation created a margin and pricing umbrella for SABMiller to enter in 2011 with a nominal-value portfolio of brands. Though priced at 20% below the market average in Nigeria, pricing is in line with the African average.
The two markets that we see as most likely to experience similar disruption for the same reasons are Angola and Kenya.
Page 98 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Diageo - beer's secondary role to spirits
On paper, Diageo has some of the best exposure to beer, with Kenya and Nigeria potentially driving 11% annual growth over the next decade. This has also been true over the last two decades. However, unlike its peers, Diageo has not delivered. Despite its potential, we are also wary of Diageo’s ability to deliver going forward based on historical evidence. We believe its beer portfolio would likely be in better hands elsewhere.
Figure 199: Diageo Africa beer growth
40000 34 mhl 35000
30000 11% CAGR 25000 Uganda 20000
15000 Nigeria
4% CAGR 12m hl Volume (Hl (Hl Volume'000) 10000 5% CAGR 8m hl 5m hl 5000 Kenya
0 1995vol 2005vol 2015DBe volume 2025DBe volume
Source: Deutsche Bank estimates, Plato Logic, World Bank
Beer’s secondary role to spirits Whereas in Latam high-margin Scotch was used to build Diageo’s lower- margin spirits business, in Africa the strategy is essentially the other way ‘round. Given the early stage of market development, beer is important in Diageo’s strategy to develop a spirits market. Beer opens the doors of taverns and pubs, after which Diageo educates the owners on the profit opportunity from spirits. The economic rationale of spirits vs. beer is compelling in Africa as well. One drop (i.e. tot) with mix of a mainstream spirits brands is typically priced at same price point as mainstream beer.
Spirits benefit when sold with beer (i.e. it sells more) but there is no convincing market evidence that more beer will be sold on a spirits platform. The evidence thus far points the other way. The reason is that spirits benefit from the migration of consumers from beer to spirits. Furthermore, in newly emerging markets, spirits benefit from beer effectively funding the development of Route-to-Consumer (RTC), as well as beer opening the doors at taverns selling beer only.
For Diageo profitability in spirits is at least equal to if not higher than that in beer. Because Diageo owns only part of the beer businesses in Nigeria and Kenya, but 100% of the international premium brand spirits businesses that sit on the beer cost base, the situation works in the company’s favor. Spirits do win in that scenario. Beer, however, has been the loser, with particular damage to the local shareholders who do not share in the benefit.
Deutsche Securities (Pty) Ltd Page 99
4 February 2015
Beverage Beer
Beer suffers structurally under spirit management Though there is some opportunity to leverage corporate skills and platforms, Beer and spirits do not work especially in emerging markets, a combination of beer and spirits on the same as a combination platform has proven difficult and tends to have limited benefits. Beer is a low- value, high-volume item that requires deep penetration into the trade. Premium spirits are high-value, low-volume items that require a wide top-end focus. The lack of synergies is apparent through the value chain:
Procurement needs differ, especially in packaging and quality of grains;
Production needs and infrastructure differ, particularly in packaging;
Warehouse management and distribution most visibly demonstrate the difference between high- and low-value items. Efficiencies are impacted by the low-volume throughput.
Working capital management differs: stock management for beer is counted in days, with best practice focusing on low- to mid-single digits. Brown spirits can stay in situ for months, if not years.
Sales model is inherently different: spirits are about opening a one-way bottle at a time, versus pushing and moving multiple crates and returnable beer container formats. For spirits, the focus is weighted towards effectiveness. Beer is much more geared towards a volume business, which requires speed and depth from production to outlet. The focus is weighted towards efficiency.
A mediocre track record in beer Reviewing the beer operations in Africa in Figure 200 and Figure 201, Diageo Diageo’s beer businesses in has strongly underperformed. In Nigeria, Diageo’s 54%-owned Guinness Africa have strongly Nigeria has seen negative profit performance in the last five years. Heineken underperformed has delivered double-digit growth in the same market. For Diageo, margins have declined 500bps over the period.
Figure 200: 5-year CAGR Africa performance (local) Figure 201: Africa subsidiaries’ margin performance
Guinness Nigeria East African Tanzania 40.0% Nigeria Breweries Breweries Breweries (Diageo) (Heineken) (Diageo) (SABMiller) 35.0% 20.0% Guinness Nigeria 30.0% (Diageo) 15.0% Nigeria Breweries Revenue 25.0% (Heineken) 10.0% EBIT East African Breweries 20.0% (Diageo) 5.0% Tanzania Breweries 15.0% (SABMiller) 0.0% 10.0% -5.0% 2009 2010 2011 2012 2013 West Africa East Africa Companies calendarized to full year 2013. Results in Local currency. Guinness Nigeria and Nigerian Companies calendarized to full year 2013. Results in Local currency. Guinness Nigeria and Nigerian Breweries in Nigerian Naira. East African Breweries in Kenyan Shillings. Tanzanian Breweries in Breweries in Nigerian Naira. East African Breweries in Kenyan Shillings. Tanzanian Breweries in Tanzanian Shillings. Tanzanian Shillings. Source: Deutsche Bank, Bloomberg Finance LP, Datastream, Company reports. Source: Deutsche Bank, Bloomberg Finance LP, Datastream, Company reports.
In East Africa, the 50.03%-Diageo owned East African Breweries (EABL) has also delivered a negative EBIT CAGR, while Tanzania Breweries has delivered results in the mid-teens. Guinness Ghana has seen a similar weak performance, with margins in 2013 hitting a paltry 6.6%. The company has also managed to
Page 100 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
lose almost 25% market share in the past three years. The spirits business is doing well. Beer is not.
Figure 202: EABL performance (East Africa) Figure 203: Nigerian relative performance
177 27.0% 70,000 176 Guinness Nigeria 26.5% 175 (Diageo) 60,000 174 26.0% Nigerian Breweries 173 25.5% 50,000 (Heineken) 172 25.0% 171 40,000 170 24.5%
169 24.0% 30,000 EBIT (USDm) EBIT 168 23.5% 167 20,000
166 23.0% (Nigerian Naira) EBIT 2012 2013 2014 10,000 EBIT (LHS) EBIT Margin (RHS) 0 2010 2011 2012 2013 2014
Source: Deutsche Bank, company reports. US$ performance Source: Deutsche Bank, company reports. Local currency.
Brands cannot carry the price in Nigeria Discussions in the market and taking our personal beer marketing experience into account, we believe that the brand equity of Guinness in Nigeria has weakened relative to other beer in Nigeria and as result can no longer carry the premium over lager. Guinness FES sells its 330ml bottle at a 10% premium to a Star in 600ml. On a liquid basis, this is a 100% premium. For those consumers who look at the alcohol impact when consuming a beer (and many do), Guinness FES delivers 7.5% ABV versus Star at 5% ABV. On that basis, Guinness is sold at a 50% premium.
Figure 204: Nigeria pricing and inflation Figure 205: Guinness price premium versus Star
140 Guinness Nigeria Pricing
$1.80 60 Per capita consumption ltr (population 130 Heineken Nigerian Beer shareof alcohol Breweries Pricing $1.60 Nigeria: 9% 48.7 50 Inflation $1.40 Cameroon: 45% 120 $1.20 40
110 $1.00 30
$0.80 2003 index= 100 index= 2003 100 $0.60 19.3 20
US$ price of a 500ml beer a 500ml of price US$ $0.40 10 90 15
$0.20 +)
$- 0 80 Nigeria Cameroon 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Price of beer (left axis) PCC 15+ (right axis)
Source: Deutsche Bank estimates, Plato Logic, Company reports. Using US$ as base currency Source: Deutsche Bank, Plato Logic, Company reports
Pricing for the Guinness brand in Nigeria has been above inflation in the few years leading up to 2013, whilst the brand equity has weakened. Over the last 10 years, pricing has exceeded inflation by c. 30%.
Historically, this premium could be justified. Relative to the local lager, Guinness quality was superior. Stouts can hide many sins, including the off flavors that potentially accompany the difficult production environment in Nigeria. Until recently, the quality of lagers varied, with many carry distinct diacetyl off flavors. However, as both Heineken and SABMiller have invested
Deutsche Securities (Pty) Ltd Page 101
4 February 2015
Beverage Beer
behind new plants and quality control, a decent lager can be found just about anywhere in the market.
Guinness marketing has also lost relevance with its target audience – a common theme for the brand globally. The African Michael Powers campaign in the early 2000’s was based on deep local insights and appealed to the masculinity of the core Nigerian consumer. However, female consumers in the last decade have become more relevant, accounting for almost 35% of beer consumption. A pure masculine proposition becomes dated as result. Additionally, with marketing more centralized at Diageo, local insights seem to apply less.
The major problem, however, sits with mainstream brand Harp, that is ~50% of Guinness Nigeria volumes. This started when management increased prices by ~8% in Oct 2013 but with Heineken not following. In a series of poor judgments by management, prices on Harp were then cut, increased (again) and cut (again). The end result was that Harp not only lost major volumes (and share) to Heineken, but management’s relationship with distributors was severely damaged. The brewer lost ~300bps market share, as well as ~270bps in operating margin. Brewing capacity utilization is only ~60%, which must be addressed, most likely with the rapidly growing value brand, Dubic, which takes a more realistic approach to pricing.
Page 102 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Ghana joint venture failing For Africa, Ghana is historically unusual as it is one of the few markets with European-style competition. Like Eastern Europe today, three well-funded players in the form of Diageo, Heineken, and SABMiller are dilutive for profitability in the market.
In 2004, Diageo and Heineken created a joint venture, with Diageo taking control, owning 52.4% of the venture and Heineken owning 20%. Heineken management left, and the venture was put into Diageo’s hands. As a result, the company ended up with 72% market share. The venture has not been successful financially.
Figure 206: Guinness Ghana profitability
45 25.0% EBIT (operating profit) 40 EBIT margin 35 20.0%
30 EBITmargin 15.0% 25
20 10.0%
15 EBIT (GHS millions) (GHS EBIT 10 5.0% 5
0 0.0% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Deutsche Bank, company reports
The financial performance in Ghana has followed the market share trend. EBIT margin peaked on the back of synergies in 2007 at 20%. In the past year, they hit 2%. It appears some one-offs are at play (mostly due to the devaluation of the Ghanaian Cedi increasing input costs), but this margin has hovered around 10%. In real US$ terms, for a business that made US$21m in 2007, seeing no growth cannot be acceptable. We believe that for SABMiller, Ghana is now becoming a significant contributor.
The operational performance is reflected in share trends. SABMiller, from a very weak position at 28% market share, today has almost equalized and caught up, as per Figure 207: Ghana market share trends. This has been on the back of two phases.
Deutsche Securities (Pty) Ltd Page 103
4 February 2015
Beverage Beer
Figure 207: Ghana market share trends Figure 208: Losing the stout market
80% market share at its peak 100% 72% when DGE took over... 90% 70% Diageo & Heineken merge operations end 80% 60% 2004; DGE manages the new JV 70% Club Lager of ABL 53% 50% takes share from 60% market leader Star 40% ..and losing 50% leadership after a 40%
30% decade of Beer market share market Beer management by DGE share market Stout 30% 20% 20% 10% 10%
0% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Guinness Ghana GBL (Heineken) ABL (SABMiller) Castle Milk Stout (6% ABV) Guinness FES (7.5% ABV)
Source: Deutsche Bank estimates, Plato Logic Source: Deutsche Bank estimates, Plato Logic
Castle Milk Stout was able to penetrate the stout market, which Guinness used to dominate. Despite being one of the few global markets where stout was growing, the growth was not captured by Diageo. Secondly, Club Lager took the leadership position from Star Lager. We are concerned that Heineken allowed one of its core brands to lapse in the hands of Diageo.
Brandhouse South Africa not likely to exist post 2017 Brandhouse was originally established on 1 July 2004 by Diageo as a three- way cost-sharing JV where the trading profit rests with the brand owner. In March 2008 Diageo extended its Brandhouse JV to incorporate Heineken and Namibia Breweries (in which Heineken has 14.5% interest). The Brandhouse JV is 50% Diageo (spirits): 50% DHN Drinks (beer). DHN Drinks is 42.25% Diageo, 42.25% Heineken and 15.5% Namibia Breweries. It is a profit share JV. To complicate matters, the Sedibeng brewery constructed outside Johannesburg for R3.5bn is owned 75% by Heineken and 25% Diageo.
Figure 209: Brandhouse South Africa structure
Brands Supply Distribution
Diageo 42.25% DHN Drinks (Pty) Ltd Diageo 25% Supply Company Diageo 50% Brandhouse (Pty) Ltd Heineken 42.25% Distribution profit JV Heineken 75% Local production JV DHN Drinks 50% Cost sharing NBL 15.50% Beer, RTD, cider Beer, RTD, cider Distribution JV
Diageo 100% Diageo SA (Pty) Ltd Diageo 100% Diageo SA (Pty) Ltd Distribution profits RTD, cider Spirits Local production
Heineken 100% Heineken Amstel, Heineken Production for import
NBL 100% Namibia Breweries Ltd NBL brands, Heineken Production for import
Source: Deutsche Bank
In South Africa Diageo’s strategy is to build higher-margin spirits business on beer. Furthermore, the shared investment in the Sedibeng brewery has allowed for capacity to also be invested more into RTM development.
A key decision point in future will be once critical mass in volumes has been achieved for each of the JV partners. DHN Drinks continues to report financial losses due to limited brewery capacity utilization and market development
Page 104 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
expenses. In the 12 months to June 2014 DHN Drinks reported a loss before tax of ZAR798m on revenues of ZAR4,552m. On formation of the JV in May 2008 Brandhouse projected economic breakeven in year three (FY2012), which did not materialize. However, as per the shareholding structure, Diageo, Heineken and Namibia Breweries may capture additional revenue and profit pools in South Africa. The JV agreement is up for renewal in 2017, and we see increasing likelihood of this arrangement coming to an end.
Figure 210: DHN Drinks South Africa still unprofitable 5,000
4,000
3,000
2,000
ZAR m ZAR 1,000
0 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
-1,000
-2,000 FY to June Net revenue Loss before tax
Source: Deutsche Bank, company reports
Both Windhoek of Namibian Breweries and Heineken are now >1mhl brands, and Amstel continues to recover. Diageo believes that DHN Drinks can do more with both the Guinness and Heineken brands, but investment required to achieve this will have to be carried by all three partners, not just the two brand owners. This situation may contribute to the JV agreement not renewed in 2017.
The recent launch of Amstel Lite is a major development. While DHN Drinks total beer sales are ~3.2mhl p.a., SAB’s Castle Lite alone is at 4mhl (total country sales ~30mhl). This represents a significant volume opportunity. Brandhouse has switched ~80% of Amstel’s marketing budget into Amstel Lite.
The Sedibeng brewery design has been scaled for 6mhl ultimately. Installed capacity is ~4mhl. There is thus adequate capacity to grow Amstel Lite. Breakeven for this brewery is ~3mhl, and presently the throughput is 3.5mhl. Therefore, if Amstel Lite takes off, it could have a very positive impact on Sedibeng’s profitability.
Diageo believes the economic rationale for tavern owners to start selling more spirits is compelling: The price to consumers for a glass of Smirnoff with Coca Cola is ~R11.50 vs. a beer quart RGB at R12.50. Profit to the tavern owner per bottle of Smirnoff is ~R100 (vs R1.00-1.30 per quart RGB), and per same value spend by customers (1 bottle Smirnoff vs. 20 beer quarts) the tavern owner can make R100 profit from Smirnoff vs. R25 from beer. The conflict with beer partners appears inevitable.
Deutsche Securities (Pty) Ltd Page 105
4 February 2015
Beverage Beer
Diageo could exit beer in Africa We do not believe Diageo intends to sell Guinness. Besides the emotional heritage (which is vast, though not necessarily respected in the current set up), both the operational model and the financial benefits effectively preclude a sale.
Guinness is unique with in beer, as it separates the wort production from the final product brewed in situ. Like the average home brewing kit and the Coca Cola concentrate model, the ‘essence’ of Guinness is brewed separately. In the case of Diageo, it is brewed in Ireland and shipped to over 60countries around the globe. Upon arrival, it is diluted 50x with a local lager stream.
The financial advantage of the model is twofold. One, like the KO concentrate model, Diageo can charge whatever the market/local brewer can bear for its concentrate and is not beholden to transfer pricing regulations (which limit a mark-up of 12% on procured goods within companies). In the case of Africa, this obviously puts minority shareholders in listed subsidiaries such as Guinness Nigeria and East African Breweries in Kenya at a distinct disadvantage as they don’t benefit at the same rate of Guinness growth as Diageo would. Second, the Irish domicile of concentrate essence production provides a distinct tax advantage in the single digits, by our estimate. The original tax inversion at play.
Nevertheless, Diageo’s performance in beer has been lacking. In the last five years, beer has underperformed all other categories within Diageo, with Guinness faring even worse.
Figure 211: Diageo beer sales split by region Figure 212: Diageo organic growth by category
100% 10% 13% 10% 90% 2% 4% 8% 80% 6% 70% 43% 48% 60% 4% 50% 2% 40%
30% 0% 28% 29% 20% -2% 10% 13% 12% -4% 0% 2010 2011 2012 2013 2014 CAGR 2013 2014 Beer (ex Guinness) Guinness Spirits Group North America Western Europe AEET LatAm Asia-Pacific
Source: Deutsche Bank Source: Deutsche Bank estimates (beer ex Guinness); Diageo
The Guinness brand has woefully underperformed not just globally, but also in Africa, with a paltry 3% CAGR since 2007.
Page 106 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 213: Guinness brand global growth
12000 1997- 2002 2002-2007 2007- 2012 The Guinness brand has Africa CAGR Africa CAGR Africa CAGR strongly underperformed 1992- 1997 11.3% 4.4% 2.9% 10000 Africa CAGR globally and in Africa -0.4% 8000
6000 ROW CAGR ROW CAGR ROW CAGR ROW CAGR 3.4% 0.9% -2.0% -2.0% 4000
Guinness volume ('000 volume ('000 hL)Guinness 2000
0 1992 1997 2002 2007 2012
ROW Africa
Source: Deutsche Bank estimates, Euromonitor, Plato Logic
For the Guinness brand, 13 Diageo subsidiaries account for 75% of its volume, with the UK, Ireland, Nigeria, Ireland, and Cameroon its biggest markets. Fourteen breweries are located in Africa`
Since South African Breweries in 1964 was granted the first license to brew Guinness outside Ireland, there are now 66 active licensees .This group includes 15 instances of Heineken managing the brand and ten by the Castel group, the latter of which all in Africa. While a sale of the brand seems unlikely, we do believe that Diageo would be better served by offloading its production assets while maintaining the very profitable license business.
Deutsche Securities (Pty) Ltd Page 107
4 February 2015
Beverage Beer
Figure 214: Diageo Africa beer footprint
Ethiopia Meta Abo brewery purchased in 2012 for $225m with 500kHl of sales
75kHl 1500 200kHl 75 kHl kHl 550 40kHl kHl
40kHl 75 75 520 50kHl kHl kHl kHl Kenya total volume 375kHl/ 4200kHl of which 520kHl Guinness & Nigeria total volume 50kHl Guinness Malta 4000kHl of which 1500kHl Guinness & Uganda total volume 1000kHl Guinness Malta 1650kHl of which 200kHl Guinness Cameroon total volume 1000kHl of which 550kHl Guinness & Diageo cons/JV 100kHl Guinness Malta Castel Guinness licensee Ghana total volume 1175kHl of which Heineken Guinness licensee 375kHl Guinness & 100kHl Guinness Malta 50kHl Other licensee
Source: Deutsche Bank estimates, company reports, Euromonitor, Plato Logic
US$5.3bn for Diageo’s Africa beer business We would view the production assets of Diageo as an attractive investment for Excluding the Guinness any of the four brewers, both as a means of consolidating their position and as brand, we value the Africa an entry point into Africa. The Guinness brand itself would likely have a beer business of Diageo to be sizeable premium, and we assume Diageo would not part with it. It already has worth $5.3bn a very profitable licensing model with the extract being supplied inclusive of sizable tax benefits from Ireland
We estimate a potential sum of the parts value in Figure 215. Based on the EV of the listed entities in Nigeria, Ghana, and Kenya, the purchase price of Ambo in Ethiopia and our estimates in Cameroon, we value the consolidated beer operational footprint of Diageo at around US$5.3 billion. Based on historical deals in beer, we assume that any acquirer would pay a 30% premium on enterprise value of the admittedly high local market capitalization.
Page 108 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 215: Sum of the parts valuation of the Diageo Africa beer assets.
local currency (million) US$ (million) East African Breweries (Kenya, Uganda, Tanzania) KSH/US$ 0.0116 Revenue 60,287 $699 2013 calendarized EBIT 15,268 $177 D&A 3,126 $36 EBITDA 18,245 $212 MV 242,768 $2,816 EV 245,894 $2,852 Diageo share of operations 54.3% 133,520 $1,549 Valuation at premium of 30% 173,576 $2,013 Guinness Nigeria N/US$ 0.0062792 Revenue 109,532 $688 2013 calendarized EBIT 17,497 $110 D&A 30,839 $194 EBITDA 27,695 $174 MV 301,178 $1,891 EV 328,873 $2,085 Diageo share of operations 54.0% 177,690 $1,126 Valuation at premium of 30% 230,997 $1,464 Guinness Ghana GHc/US$ 0.4863 Revenue 319.8 $156 FY to June 2013 EBIT 25.2 $12 D&A 31.7 $15 EBITDA 56.9 $28 MV 1,003.9 $488 EV 1,060.8 $516 Diageo share of operations 52.42% 556.1 $270 Valuation at premium of 30% 722.9 $352 Ambo Ethiopia US$ Purchase price 2012 $225 Purchase price Diageo share of operations 100% $225 Value at premium of 50% $338 Guinness Cameroon US$ Beer volume lager (hL) 950,000 Estimate Revenue (est) @ $175/hl (=Nigeria) $166 EBITDA @25% margin (=Nigeria) 25% $42 Share 100% $42 Valuation at EBITDAx of 18 $748
Total EV Diageo beer assets $5,252
Source: Deutsche Bank estimates, company reports, Market values as of July 10th, 2014.
Valuation and risks for Diageo We value Diageo via a DCF using a WACC of 7.4%, years 6-10 cash flow growth of 4.7% and perpetuity of +1.5% as with other spirits companies. Risks include global growth, competitor activity and M&A.
Deutsche Securities (Pty) Ltd Page 109
4 February 2015
Beverage Beer
Castel - acting like owners, because they are
The Castel Group was established in 1949 in Bordeaux, France, by nine brothers and sisters. Under the leadership of Pierre Castel, now 87, it has become France’s largest wine producer and fourth-largest globally. Its beer and soft drinks business started in 1967 when it purchased a brewery in Gabon. In 1990 it purchased Societe des Brasseries et Glacieres Internationales (BGI), which entrenched Castel’s leading position in the Francophone African beer and soft drinks market.
Castel’s beer business model was developed in Africa, literally from the ground up, evolving over the last 40 years into one very well suited for this market. It operates a fairly decentralized beer business model, with country operations characterized by fairly autonomous management and strong local partners. Aiming for synergies, it operates integrated beer and water production/packaging facilities, with distribution outsourced to independent entities. Its breweries and bottling plants are very cost-efficient operations with a strong cash flow objective. In some African countries Castel is vertically integrated, also owning and operating sugar and flour businesses, for example.
Figure 216: Castel 2015DBe volume split
Cote d'Ivoire Gabon Congo, Dem. Rep. 7% 5% Burkina Faso 7% 4% Madagascar Ethiopia 4% Togo 8% Benin 2% 3%Morocco 2% Chad Senegal 2% 1% Cameroon Equatorial Guinea 1% 17% Guinea 1% Angola CAR 36% 0% Guinea-Bissau 0% Gambia 0%
Source: Deutsche Bank estimates, Plato Logic, company reports
On 1 April 2001, SABMiller and the Castel Group established a pan-African beverage alliance, excluding South Africa. Based on a nil premium share exchange on the relative profit base, SABMiller acquired a 20% stake in the Beer Division of Castel, which in turn acquired a 38% stake in SABMiller’s African operations. This strategic alliance effectively combined the largest brewer in English-speaking Africa (SABMiller) with the largest brewer in Francophone Africa (Castel), with mostly complementary market positions across Africa.
A decade later in January 2012, the alliance was adjusted with cognizance of the outperformance of Castel over SABMiller’s Africa operations as realigning some M&A that had occurred over the years. The companies started competing in Angola, which diluted profits, and Castel ended up with a brewery in Ilesha, Nigeria as a result of its purchase of the Warsteiner interests in Africa. With the reorganization SABMiller took management control in Nigeria (including Castel’s 0.6mhl brewery in Ilesha) with a 50% profit split,
Page 110 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
while Castel took management control of the combined Angolan beer and soft drink operations with profit share of an estimated 27.5%.
Angola driving historically strong growth Angola is Castel’s core African market, and over the last decade it has also been one of Africa’s fastest growth beer markets. The country’s 13% CAGR in beer volume growth from 2003 to 2013 contributed materially to Castel’s higher growth rate than that for SABMiller Africa during this period. The reorganization allowed Castel to drive significant synergies (Angola’s expatriate costs are deemed to be some of the highest in the world). Despite pricing below inflation, operating leverage from the large volume growth has driven some of the strongest margins in Africa.
Figure 217: Angola beer market performance
14000 120.0 Per Capita Consumption (pop 15+)(pop Consumption Per Capita Volume 2005-2015DBe CAGR 12000 Volume: 15% 100.0 PPC 15+ PCC: 11% 10000 80.0 8000 1995-2005 CAGR 60.0 6000 Volume: 15% PCC: 12% 40.0 Volume ('000Hl) Volume 4000
2000 20.0
0 0.0
Source: Deutsche Bank estimates, Plato Logic, World Bank
Recently, Angola is seeing increased competition in its core market. Unicer -an associate of Carlsberg- presently exports ~2mhl from Portugal. It has had plans to establish a brewery for the last 20 years. Heineken has recently signed a JV deal with Isabel dos Santos (wealthiest woman in Africa, daughter of the Angolan President), with the brewer taking 40% equity in the production company and 60% in the distribution company. This is a bigger threat for Castel as it is more likely to happen in the near future.
Strong potential, with an ability to execute Castel has a favorable profile for beer growth, and we expect a 7% CAGR in the next decade. The core growth drivers are Ethiopia, where it is the leading brewer, as well as the Democratic Republic of Congo. The recent acquisition in Madagascar of Three Horses Brewery should also be a strong financial opportunity and ripe for adopting the best operating practices that Castel brings to its operations.
Deutsche Securities (Pty) Ltd Page 111
4 February 2015
Beverage Beer
Figure 218: Castel Africa beer growth south of the Sahara
70,000 61mhl 60,000
50,000 7% CAGR
40,000 DR Congo 30,000 9% CAGR 30 mhl
Ethiopia Volume (Hl (Hl Volume'000) 20,000 Cameroon 4% CAGR 10,000 12 mhl 8 mhl Angola - 1995vol 2005vol 2015DBe 2025DBe volume volume
Source: Deutsche Bank estimates, Plato Logic, World Bank
Castel, perhaps one day, just not the way you think For the sake of completeness, in Figure 219 based on the lower end of recent “It is unlikely a deal will transactions in brewing, we value the Castel Africa beer and soft drinks happen under Pierre Castel, business at $30 billion on a 12x FY16E multiple should any party buy the but it is possibly more doable business outright. With SABMiller holding a 20% stake, along with various with the next generation. It is rights to purchase at an agreed formula, much ink has been spilled on the more a question of ‘when’ potential timelines (often linked to the specter of the Castel chairman retiring, as the SABMiller CFO recently said) and structures of a deal. Questions have than an ‘if’.” also been asked about what happens to the rights to purchase Castel should CFO SABMiller SABMiller itself be an acquisition target. The company has given varying June 2014. responses to that question. Moreover, we believe it is not the relevant question. We see three considerations as being more relevant:
1. Its strategic alliance with SABMiller benefits Castel more than SABMiller
Families tend to exit the beer business when they are under competitive threat (e.g. Bavaria in Latin America), there is lack of control (e.g. Anheuser Busch) or there is generational discord. Heineken’s independence can be partially attributed to the fact that none of those factors apply. The same is true for Castel.
The core focus for the Castel family (which extends quite widely in the business beyond the chairman) has been to protect its profit pools in Africa. Their businesses enjoy unrivaled leadership positions. When there is a threat, the companies have been co-opted (Castel has brand license agreements with the four main brewers), or in the case of SABMiller, alliances have been agreed. From Castel’s perspective, it seems the purpose of the original alliance agreement with SABMiller was to prevent the company from entering Francophone Africa. The alliance was based on competitive threats as SABMiller had purchased a piece of land in Cote d’Ivoire directly across the street from the Castel brewery. An agreement was soon reached to prevent any further encroachment.
Page 112 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
2. It is fiercely independent
The renewal of the strategic alliance with SABMiller in 2012 quadrupled the profit pool in Angola for Castel and gave SABMiller an encouraging hand in Nigeria. It also strengthened the pre-emption rights for SABMiller as well as recognizing the outperformance of Castel over SABMiller Africa in the previous decade. However, we don’t necessarily see the urgency of an all-or-nothing deal with the “next generation”.
Rather, Castel is seeking to strengthen its independence, which was recently apparent in the Coca Cola Beverages Africa joint venture formation. We believe SABMiller would have been keen (and likely still is) for Castel to fold its Coca Cola operations into the new joint venture. However, with the involvement of three parties already (SABMiller, the Gutsche family, and Coca Cola), Castel may be one party too many. Key for SABMiller, in our opinion, would be to prove to Castel that the CCBA venture is workable and profitable.
We believe it would be difficult to convince Castel to join as it would probably have to sell its own B- brands, which form a significant part of the portfolio, symbolize its independence and strengthen its position when negotiating agreements with Coca Cola. It can be argued that with the exception of the Cola franchise, markets in Africa favor local brands in soft drinks. Outside the Coca Cola framework it also recently acquired a significant stake in Sumol + Compal, a leader in Portuguese non-alcoholic beverages with a large presence in Africa, especially Angola. Whereas SABMiller was willing to give up its own soft drinks, such as Appletizer and Club minerals, to play in the Coca Cola sandbox, we see Castel as unlikely to do so.
Castel is also more dependent on soft drinks than is SABMiller due to some of its exposure in North Africa. Given the evolution of religious fundamentalism in some of their markets, depending only on beer would be a strategic mistake. Castel is looking for smart business moves that reinforce its independence, not for somebody to retire.
3. SABMiller is the natural choice and has strong rights, but others can disrupt the party
Heineken has a relationship with Castel that predates SABMiller, on both business and personal levels. It currently also owns 9% of Castel’s Brasseries du Cameroon (SABC) and licenses its brands to the company. We estimate that 20% of the current portfolio at SABC consists of Heineken brands including Amstel, Mutzig and the Heineken brand. Similar to the situation in South Africa in 2007 with the Amstel brand, should SABMiller buy Castel, Heineken could exercise its change of control clauses and immediately gain strong positions in key African markets. The relationship has become more aggressive recently with Heineken’s entry into Castel territories such as Algeria and Ethiopia.
Similarly, ABInBev has been interested in finding a way to enter Africa and has renewed its licensed agreements on Becks and Stella Artois in Algeria. And the pragmatism of Castel is very closely aligned to the Brazilian culture. Though we don’t believe that Africa is necessarily waiting for Budweiser, it would not surprise us that as part of their asset-light strategy, further agreements with ABInBev are possible.
Deutsche Securities (Pty) Ltd Page 113
4 February 2015
Beverage Beer
In both cases, the companies could leverage their relationship and raise the possibility of buying Castel, or (perhaps inadvertently) raise the purchase price. Though SABMiller has pre-emption rights as well as last right of refusal, a bona fide party could enter the fray to top the offer, or for that matter, provide a structure that SABMiller cannot match. In 2010, Heineken trumped SABMiller on the FEMSA deal by involving its holding structure and board seats. Heineken might want to create a similar structure once again to do a deal with Castel if the opportunity presents itself – one SAB could find hard to match.
We would assume the Castel family is not necessarily looking for money, but rather seeking to secure a legacy for future generations. SABMiller seems the natural candidate to do so. However, having a significant stake in a professionally managed family company such as Heineken, or a culturally similar company like ABInBev, might be as appealing as continuing the strong relationship with SABMiller. It keeps everybody on their toes.
Figure 219: Castel summary valuation Castel EBITDA (US$m) FY14 FY15DBe FY16DBe SABMiller EBITA Africa associates 398 414 455 Depreciation 107 106 110 EBITDA 505 520 565 -Delta Corporation EBITDA (40%) -66 -69 -76 SABMiller 20% 439 451 490 Castel 100% EBITDA* 2,194 2,255 2,449
Valuation at EBITDA multiple (US$m) FY15DBe FY16DBe 12x 27,058 29,388 14x 31,567 34,287 16x 36,077 39,185 Source: Deutsche Bank estimates
Page 114 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The KO opportunity
Leveraging ancillary beverages adds scale to the highly capital- and expatriate- management-intensive brewing operations, particularly in the smaller markets that make up Africa. Similar to the high-volume, low-value nature of beer, soft drinks are an attractive addition to the brewers - combining them creates favorable margin synergies. Recent activity has seen the formation of Coca Cola Beverages Africa, the mega bottler led by SABMiller that will most likely further consolidate the African Coca Cola market.
Beer & Coke works
How much synergy will be driven between beer and soft drinks? The combination of beer and soft drinks brings benefits and enables additional value through integration. With a common platform of low-value, high-volume products, both categories benefit on the cost component and mostly benefit through efficiency and leverage measures.
Figure 220: Beer/soft drinks integration points
Integration points Executive Management Back office support functions (Finance/HR/Procurement) Commercial support functions Effectiveness focus (Marketing/Channel) Efficiency focus Separate business Facilities Integrated business Revenue benefits Manufacturing Cost benefits 1 Distribution 2 Distribution Rural sales Urban sales Premium sales
Source: Deutsche Bank
The debate focuses on the effectiveness, rather than the efficiency, of the combination. Franchise owners like The Coca Cola Company (TCCC) are particularly concerned that the lack of focus will damage the soft drinks portfolio in the same way that the focus on spirits damages beer.
A proven model in emerging market businesses Combining beer and soft drinks has been common in emerging markets, especially in smaller markets where the infrastructure leverage is most tangible.
Deutsche Securities (Pty) Ltd Page 115
4 February 2015
Beverage Beer
Figure 221: Soft drink P&L only EBITA and gross margins
70% soft drinks P&L only Gross margin 60% EBIT margin 50% 40% 30% 20% 10% 0%
Source: Deutsche Bank estimates, company reports
As seen in Figure 221, operations that have combined have a record of better Combining beer and soft margin delivery. In the soft drinks P&L, Ambev’s operations in Latin America drinks in emerging markets with Pepsico and its own soft drinks deliver EBIT margins around 40%. has significantly enhanced margins In Africa, SABMiller’s listed subsidiaries in Africa report margins in the 20% range (despite Coca Cola taking broader share of the profit pool than PepsiCo would). In contrast, before delisting in 2011, Coca Cola Hellenic’s EBIT margins in Nigeria peaked at 6%. Similarly, but not burdened by the concentrate pricing dynamics, the listed 7-UP bottling company in 2013 reported margins of 8.6%.
Page 116 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The KO African landscape
A billion-dollar profit pool and growing… The size of the TCCC bottler market in Africa closely resembles that of beer and exceeds just over 100 million hl according to our estimates, company reports and Euromonitor.
Figure 222: Africa TCCC bottler volume share Figure 223: Estimated bottler profit split
Delta (Zimbabwe) HeinekenDelta (Zimbabwe) Others Heineken Others Penbev 2% 3% 2% 1% Penbev 3% 3% (South Africa) (South Afric) 1% 4% MAC (Egypt) 4% MAC (Egypt) CCBAfrica CCH (Nigeria) 7% 6% 40% ECCBC 7% CCBAfrica CCH (Nigeria) 48% 11%
ECCBC 10% Castel Castel 27% 20%
Source: Deutsche Bank estimates, company reports, Euromonitor Source: Deutsche Bank estimates, company reports, Euromonitor
With average revenue of €70/hl and EBITA margins ranging from 6% to 10%, we estimate the profit pool for the bottlers now exceeds $1 billion.
…but so is the competition… A notable development in the Africa soft drinks market, and by implication for the established TCCC bottlers, has been the significant increase in competition. Up to six years ago competition in most African soft drink markets was weak on both product quality and branding. Low price was their only competitive edge. Today these b-brands are offering good-quality product and benefitting from product innovation and better marketing. Low barriers to entry remain, as are the low prices of b-brands.
We estimate that setting up a PET soft drink plant costs less than US$5m including a PET facility. This inexpensive packaging is highly disruptive to established markets that are traditionally based on returnable glass bottles. These new entrants are mainly from the Middle East. New regional bottlers of b-brands include Harris International and Sai beverages in Uganda, Bahresa group in Tanzania and Crystal Beverages in Rwanda. Harris International also exports its soft drinks to South Sudan and Rwanda.
Then there is Pepsi. PepsiCo bottler Moha Soft Drinks SC already produces more than half the market volumes in Ethiopia, a key growth market for both soft drinks and beer. In Zambia PepsiCo brands have been developing very aggressively, with its branding occupying disproportionate share of public space. This has seen the brand acquiring market share of above 30%, in part at the expense of SABMiller, and what for it is the biggest African TCCC soft drink market. In contrast to South Africa, PepsiCo is growing share very rapidly in sub-Saharan Africa. This level of competition for TCCC bottlers is on branding, not price.
Deutsche Securities (Pty) Ltd Page 117
4 February 2015
Beverage Beer
Figure 224: Africa TCCC bottlers
CCB Africa
Delta/LBC (SABMiller minority stake)
Castel (SABMiller Associate)
Coca Cola Hellenic
ECCB /COBEGA
MAC
Heineken
Carlsberg
Other*
* Otherincludes: Kenya – Amalsi, Equator, Coast Tanzania – NBC, Bonite bottlers Mauritius – Phoenix Beverages Angola – Sefa
Source: Deutsche Bank, company reports and interviews
…and high bottler margins are under pressure This competition has recently started to affect the margins of TCCC bottlers. Given the impact of price competition from b-brands, TCCC bottlers can only price in line with CPI at best. This has seen pricing on the second-liners Fanta and Sparletta in many African markets being cut, but to limited market-share effect. The Coca-Cola brand continues to earn a premium price point on its consistent product quality proposition. Nevertheless, the price mix for TCCC bottlers in Africa is under pressure.
Another challenge for TCCC bottlers is input-cost inflation. We estimate that concentrate pricing is ~32% of COGS and increasing at around the USA CPI per annum. However, the total US$ exposure in COGS of TCCC bottlers is ~70% given the impact of US$-priced commodities (sugar etc.) and packaging (aluminum cans etc.). Following recent depreciation of local currencies against a resurgent US$, the TCCC bottlers now face major input cost inflation, and at a time when price mix is weak.
Page 118 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Beer/Soft drink bottlers in Africa In the face of increased pressure, the best means to protect bottler margins is to drive scale in the operations. Combining operations with beer allows that. Despite the historical reticence of Coca Cola to allow combined operations, today in Africa the majority of markets have or will have combined operations.
Figure 225: Combined brewer bottler in Africa
Tunisia Morocco
Algeria Libya Western Egypt Sahara
Mauritania Mali Chad Eritrea Niger Sudan Senegal The Gambia Burkina Djibouti Guinea Guinea Bissau Nigeria South Cote Sierra Leone Ghana Central Sudan d‘Ivoire African Ethiopia Liberia Benin Republic Togo Cameroon
Equatorial Uganda Somalia Guinea DRC Kenya Congo Gabon Rwanda Burundi Brewer / bottler Angola Tanzania
Specialist bottler Malawi Angola
Zambia
Zimbabwe Namibia Mozambique South Africa Botswana
Swaziland
South Africa Lesotho
Source: Deutsche Bank estimates, company reports
Deutsche Securities (Pty) Ltd Page 119
4 February 2015
Beverage Beer
The Coca Cola Beverages Africa deal
In December, SABMiller announced plans to merge its existing Coke bottling businesses with those of SABCO, to create a south/eastern African business operating across 12 countries. This makes SABMiller the 10th-largest TCCC bottler worldwide and doubles down on Africa, which we view as the driver of growth over the next decade in both beer and soft drinks. We think this deal is more likely to mark the first step in a bigger phase of deals between beer and soft drinks businesses, where we see considerable opportunities.
12 African markets to create Coca Cola Beverage Africa Creating a separate business unit, the transaction combines African soft drink operations of SABMiller, SABCO and The Coca Cola Company (TCCC). The respective shareholdings are based on respective profit contribution but with a small control premium paid to Gutsche Family Investments (GFI) which owns SABCO.
Figure 226: Coca Cola Beverages Africa new footprint
Core SABMiller Coca Cola territory
Core SABCO Coca Cola territory
Ethiopia SABCO soft drinks 1 million hl SAB soft drink drinks 0.3 million hl (Ambo water)
Kenya SABCO soft drinks 2 million hl SAB soft drink drinks 0.3 million hl (Crown beverages)
Uganda Brands sold to Coca Cola SABCO soft drinks 1.5 million hl Club Minerals 0.3million hl SAB soft drinks 0.8 million hl (Rwenzori Water) (Ghana & South Sudan) SAB Beer 0.9 million hl Voltic 3 million (Nigeria & Ghana) Tanzania Appletizer SABCO soft drinks 3 million hl SAB Beer 3 million hl Botswana SAB soft drink drinks 0.7 million hl Zambia SAB Beer 0.6 million hl SAB soft drink drinks 1 million hl SAB Beer 1.2 million hl Namibia SABCO soft drinks <0.5 million hl Mozambique SABCO soft drinks <1 million hl South Africa SAB Beer 2.1 million hl SABCO soft drinks 9 million hl Swaziland SAB soft drink drinks 27.3 million hl SAB soft drink drinks 0.2 million hl SAB Beer 18.3 million hl SAB Beer 0.2 million hl
Source: Deutsche Bank estimates, company reports, Plato Logic, Europmonitor
SABMiller’s soft drink operations, including the Coca Cola bottlers South Africa (ABI), Zambia, Botswana, Swaziland and the Indian Ocean Islands. Additionally, the non-Coca Cola businesses in Uganda, Kenya, Ethiopia, Appletiser will be included. SABMiller will own 57% of the business.
The African interests in the family bottler SABCO in South Africa, Namibia, Mozambique, Tanzania, Kenya, Ethiopia, and Uganda. The family holding company behind SABCO, Gutsche Family Investments, will hold 32%.
Page 120 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
TCCC will contribute its equity share in SABCO (estimated at 20%), as well as Coca Cola Canners, Valpre and Shanduka bottler in South Africa. TCCC will hold 11%. The transaction will be completed in two phases. The SABCO and TCCC components are expected to be completed at the beginning of SABMiller’s F15. The second phase incorporating Swaziland, Zambia, and Botswana will not be completed until the end of F16.
Plenty of opportunity for growth… Though the businesses are of similar size in volume, SABMiller has been able to drive higher profit growth.
Figure 227: The businesses have similar volume scale…. Figure 228: but SABMiller generates higher revenue/HL
30.0 90.00 80.00 72.90 25.0 68.92 70.00 21.0 20.4 20.0 60.00
50.00 15.0 40.00
10.0 30.00
20.00 5.0 10.00
0.0 0.00 SABMiller CC SABCO + Other SABMiller CC SABCO + Other Volume (mHL) Revenue/HL (US$)
Source: Deutsche Bank, company reports Source: Deutsche Bank, company reports
The deal also enables a clear opportunity for the combined entity to substantially lift margins on the SABCO business, as well as capture scale synergies on SABMiller’s side.
Figure 229: EBITA margin difference Figure 230: Return on Assets (phase I only)
25.0% 50.0% 45.0%
20.0% 19.1% 40.0%
35.0% 15.1% 31.1% 15.0% 30.0%
25.0%
10.0% 20.0%
15.0% 12.8%
5.0% 10.0%
5.0%
0.0% 0.0% SABMiller CC SABCO + Other SABMiller CC SABCO + Other EBITA margin Return on assets
Source: Deutsche Bank, company reports Source: Deutsche Bank, company reports
There is further potential to lift financial productivity on SABCO’s assets as well.
Deutsche Securities (Pty) Ltd Page 121
4 February 2015
Beverage Beer
…in one of the best-run Coca Cola bottlers SABMiller already delivers the highest EBITA margin as a Coca Cola bottler. Part of this is operational discipline and its ability to negotiate favorable terms with TCCC. It also demonstrates the potential cost synergies between soft drinks and beer. The question is whether the new CCBA will be allowed to capture synergies between the legal entities. Or, more worryingly, will TCCC insist on an arm’s-length structure (like CC Icecek) that would imply limited operational and distribution integration?
Figure 231: Listed bottlers EBITA margins
25.0%
19.1% 20.0% 17.2% 14.3% 15.0% 15.1% 15.0% 11.9% 12.0% 10.2% 10.0% 6.6%
5.0%
0.0%
EBITA margin (2014 / most recent FY)
Source: Deutsche Bank, company reports
Coca Cola equity should ensure a closer relationship…. A core driver for the transaction is to develop a closer relationship with TCCC. At times this relationship has been constructive but tense, which one can argue, has led to outperformance of SABMiller’s soft drinks relative to its peers. The final terms will see TCCC take a 11.4% stake, a normal occurrence in the larger bottlers in the system.
Figure 232: Coca Cola Beverages Africa shareholding Figure 233: KO equity participation in selected bottlers
KO 60% 12% 11%
49% Global share volume KO 50% 10%
40% 8% 28% 30% 30% 6% 23% 20% GFI 20% 15% 4% 32% SABMiller 11% 57% 9% KO Equity KO participation 10% 2%
0% 0% FEMSA CCH CCI CCBA Arca Andina SOLAR ECCBC
KO equity participation Global KO market share
Source: Deutsche Bank, company reports. Final economic shareholding post phase II. Source: Deutsche Bank, company reports and interviews
Page 122 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
…but there is a price to play in the Coke sandbox Perhaps the biggest surprise of the deal is that the enlarged bottling business has been unable to negotiate a concentrate deal across all of its markets, but will still have to deal with TCCC on a market-by-market basis. On this cost component, which accounts for 20-25% of revenue by market, TCCC has shown a willingness to increase concentrate pricing at will, as recently experienced by Coca Cola Hellenic. There seems to be no agreement that prevents this.
The deal itself will also see SAB sell a number of its soft drinks brands to TCCC (The Coca Cola Company), 19 in total valued at $260m. The key brand in this stable is Appletiser due to its global distribution and relative premium positioning with soft drinks, but we estimate its profit contribution to be minimal to SABMiller. A bigger impact to the company will be the loss of cash- generative brands outside the agreed footprint such as Voltic in Nigeria and Ghana and Club Minerals in Ghana and South Sudan. This will bring useful benefits to some of the other Coke bottlers in certain markets, notably CCH in Nigeria and ECCBC in Ghana and South Sudan.
EVA deal should be positive from day one The deal is Economic Value Added (EVA) positive from day one, on our numbers – and our conservative assumptions imply even more upside potential to create shareholder value. We arrive at this conclusion by incorporating into our calculations the following assumptions:
Given the lack of information (in this case on current operating liabilities to derive net assets), we use the gross assets as proxy for invested capital. This assumption conservatively understates the ROIC value.
For the steady-state (i.e. excluding the deal impact) we project that the individual businesses grow sales by 5% per annum.
Amortisation/sales ratio of 0.5%, which is typical for TCCC bottlers.
We assume deal synergies in 2015 equivalent to 1.0% of sales, increasing to 3.5% by 2018. This implies total synergies over the four-year period equivalent to 4.3% of combined sales in 2014. We think this is a conservative assumption.
We use EBIT in calculating NOPAT, as the return is for total capital and not only equity capital (which would have required interest expense).
Tax rate of 30%.
Given the lack of information on SABCO, we have not employed a blended WACC. We employ the blended WACC for SABMiller Africa and South Africa as the deal WACC, which we estimate at 9.1% (vs. group 7.9%).
Deutsche Securities (Pty) Ltd Page 123
4 February 2015
Beverage Beer
Figure 234: We estimate the deal to be EVA positive from day one
Steady state US$ m 2014 2015E 2016E 2017E 2018E
Additional investment 0 0 111 0 0 Invested capital 2,387 2,387 2,499 2,499 2,499
Sales 2,776 2,915 3,238 3,400 3,570 YoY grow th 5.0% 5.0% 5.0% 5.0% EBITA 463 486 557 585 614 EBITA margin 16.7% 16.7% 17.2% 17.2% 17.2% Amortisation 14 15 16 17 18 of sales 0.5% 0.5% 0.5% 0.5% 0.5% EBIT 449 472 541 568 596 EBIT margin 16.2% 16.2% 16.7% 16.7% 16.7%
Synergies Sales - 15 49 68 89 % of sales 0.5% 1.5% 2.0% 2.5% Costs and Efficiencies - 15 32 34 36 % of sales 0.5% 1.0% 1.0% 1.0% Total EBIT synergies added - 29 81 102 125
Post synergy EBIT 449 501 622 670 721 EBIT margin 16.2% 17.2% 19.2% 19.7% 20.2% EBITA margin 16.7% 17.7% 19.7% 20.2% 20.7%
Deal EVA Tax rate 30% 30% 30% 30% 30% NOPAT 314 351 435 469 505 ROIC (based on gross assets) 13.2% 14.7% 17.4% 18.8% 20.2% Deal WACC 9.1% 9.1% 9.1% 9.1% 9.1% Delta EVA (100%) 96 133 207 241 277
====> Deal is EVA positive from beginning, w ith substantial upside from deal synergies We assume conservatively synergies equivalent to 4.3% of combined 2014 sales
SABMiller w ill also receive US$260m for selling selected soft brands to TCCC Source: Deutsche Bank, Company data
Management indicated that the deal will become earnings enhancing only from year three.
Page 124 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
SABCO: an additional 18 million hl in 7 markets The South Africa Bottling Company (SABCO) has owned the franchise rights to Figure 235: SABCO volume split Coca Cola in the South African regions of the Eastern Cape since 1940, with expansion in the 1970’s adding parts of Free State and Kwazulu-Natal. Kenya Ethiopia
The company ventured into Africa in 1994 expanding into Mozambique. Uganda Named an anchor bottler a year later, SABCO attained further rights in South Africa
Namibia, Kenya, Tanzania, and Uganda, followed by majority ownership in Tanzania
Ethiopia in 2001. Namibia Mozambique
Notably, the current assets in Asia are excluded from the deal. Expansion into Asia for SABCO has proven to be more difficult. Though still involved in Nepal Source: Deutsche Bank estimates, Euromonitor, company reports and Sri Lanka, other assets in the so-called ‘hospital ward’ of Coke bottlers such as Vietnam have been returned to TCCC.
Figure 236: SABCO African footprint volume Plants Market Established (million hl) # Location South Africa 1940 9 5 Port Elizabeth Led consolidation from the 70's, expanding its original franchise territory beyond Port Elizabeth (Eastern Cape). Culminated in Port Shepstone 2002 merger with Fortune beverages in 2002. Bloemfontein Currently accounts for 26% of the Coca Cola market in South Nelspruit Africa. Polokwane Mozambique 1994 <1 3 Maputo Greenfield entry for Coca Cola. Currently $140m being invested for plant build in Matola Gare, outside Maputo Chimoio Nampula Namibia 1995 <0.5 2 Windhoek 71% ownership by acquiring Paradise beverages in 1995, partnership with Namibian Development Corporation Oshakati Tanzania 1995 3 3 Dar es Salaam Acquired Tanzania Bottlers from Aris Cassolis. Zanzibar Renamed Coca Cola Kwanzaa Mbeya Uganda 1995 1.5 2 Kampala Acquired Century Bottling Company Mbarara Ethiopia 1995 1 2 Addis Abiba Shareholding since 1995, majority (61%) since 2001. Dira Dawa Building third plant in Bahir Dar Kenya 1995 2 1 Nairobi Acquired Nairobi Bottlers which combined with Flamingo bottlers (1997) and East Kenya Bottling (2000). 48% of the Coca Cola market in Kenya. Source: Deutsche Bank estimates, Euromonitor, company reports
Deutsche Securities (Pty) Ltd Page 125
4 February 2015
Beverage Beer
Consolidating South Africa the initial opportunity The big initial price is the opportunity to consolidate South Africa. The combination will lead to SABMiller managing 93% of the volume and on our estimate 94% of the profit pool in South Africa. SABCO contributes a quarter of the market and Shanduka the remaining 4%.
Figure 237: South Africa Coca Cola franchise territories
Volume share PenBev 12% Shanduka 7%
ABI (SABMiller) Fortune 55% (SABCO) 26%
Profit pool share (EBIT) PenBev Shanduka 8% 4%
Fortune (SABCO) 24%
ABI (SABMiller) SABMiller 64% Shanduka
Sabco/ CCFortune
PenBev
Source: Deutsche Bank estimates, company reports and interviews
The only exception will be PenBev, which will remain independent and retains the rights to Coca Cola in the Western and Northern Cape.
Page 126 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
More opportunity in Kenya? Though SABMiller will initially keep the soft drink operations separate, this will Figure 238: Kenya Coke bottlers nevertheless provide an opportunity for SABMiller to eventually re-enter the share Kenyan beer market. The incumbent brewer EABL is owned 51% by Diageo. Equator Despite its 98% market share, EABL performance has been sub-optimal, 10% Coast especially relative to the SABMiller operations next door in Tanzania. 11%
Nairobi Bottlers Kissi (Amalsi) (SABCO) Like South Africa, there is also further opportunity to consolidate the Kenyan 9% 48% Coca Cola market as SABCO holds only 48% Coke market share. The main Rift Valley shareholder Centum’s rival, Amalsi, also has a 27% stake in the Kenya SABCO (Amalsi) 12% Mount Kenya operations, which should make any deal easier to consummate. (Amalsi) 10%
Source: Based on volumes. Deutsche Bank estimates, company CCBA integration will be on a case-by-case basis, but benefits will accrue reports, Euromonitor Mindful of Coca Cola concerns, the SABMiller CEO was keen to ensure that the management of the soft drink business will focus on the effectiveness side of the equation, i.e. optimizing growth for scalability. The current operation in South Africa shares a common platform in its back-office functions, such as human resources, and also benefits from the global procurement operations. Smaller markets such as Mozambique and Tanzania will most likely integrate a small step further up the value chain to include high-cost items such as utilities and expatriate management.
The phase II markets (Swaziland, Botswana, Zambia) will have to take a more nuanced approach. These operations are further integrated, often sharing manufacturing facilities and distribution, and even to an extent trade capital investment. The danger is the potential for dissynergies.
Deutsche Securities (Pty) Ltd Page 127
4 February 2015
Beverage Beer
The other big bottlers in Africa
Castel 20m Hl of soft drinks in 20 markets an attractive next step We were somewhat surprised that SABMiller’s West African JV partner Castel was not announced as a participant in the deal, but understand from both parties that the company was involved in the discussions. Perhaps one family group too many in a threesome?
As a reminder, SABMiller Africa has a 20% share in the group (with exception of Algeria and Morocco, in which it has 40% and Angola in which it has 27.5%). The French private Castel group bottles for TCCC in 20 African markets, producing around 20 million hl of soft drinks. The largest component of its soft drinks portfolio is Coca Cola brands, though it maintains a sizeable proportion of its own brands and water, which sits outside the confines of the KO agreement.
Figure 239: Castel soft drinks volume split – 20 markets for 20m Hl
Gabon Cameroon Cote d'Ivoire Madagascar
Algeria Senegal Burkino Faso Togo DRCongo Angola Mali Benin Chad Equitorial Guinnea Niger Tunisia Central African Republic Guinea Conakry Mauritius Gambia
Source: Deutsche Bank estimates, company reports, Euromonitor
Tunisia, Angola, Algeria, Cameroon and Gabon account for over two-thirds of the soft drinks volume (Figure 239). The composure of the volume differs markedly by country. Water accounts for the vast volume in Algeria and Tunisia. The sparkling Coca Cola portfolio dominates Angola and Cameroon. We also estimate that the latter two account for the profitability in soft drinks.
As part the asset swap with SABMiller in 2011, Castel took full control of the Angolan Coca Cola business, which was established in 1997. The combination of beer and soft drinks led to margin enhancement from single digits to mid- thirties, making Angola disproportionately profitable for Castel.
With increased pressure in the markets from b-brands and ‘wildcat’ Pepsico bottlers, we eventually expect Castel to come to a creative arrangement with the new CCBA.
Castel is vertically integrated to a large extent in soft drinks, and for example supplies sugar to TCCC bottlers in some markets. Castel’s own soft drink portfolio is growing faster than its TCCC portfolio, and in many cases has higher margins as it excludes the concentrate expense. Excluding South Africa, we estimate around two-thirds of SABMiller’s Africa soft drink exposure sits with Castel. Prior to the formation of CCBA, Castel was actually a bigger contributor for TCCC than SABMiller. Combining these businesses eventually does offer major potential synergies.
Page 128 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Equatorial Coca Cola Bottling Company (ECCBC) 10 m hl in 13 markets The Barcelona-based group operates in 13 markets in Africa with 15 plants, and, like most bottlers in Africa, infused with former SABMiller personnel. ECCBC is owned 60.37% by COBEGA, the Iberian bottler led by the Daurella family. TCCC share in the enterprise is estimated at 30-35%.
Figure 240: ECCBC Africa footprint 2013e mHl Market volume Plants Subsidiary Algeria 2.5 1 Fruital Cabo Verde 0.2 3 Industria de Bibidas de Cabo Verde Gambia 0.2 1 Gambega Ghana 1.4 2 The Coca Cola Bottling Company of Ghana Equitorial Guinea 0.2 0 Guinebega Guinea Bissau 0.0 0 Bissabega Guinea-Conakry 0.2 1 Bonagui Liberia 0.1 1 Liberia Coca Cola Company Morocco 5.4 4 North African Bottling Company Mauritania 0.1 1 SOBOMA Societe des Boissons Gazeuses Sao Tome & Principe 0.0 0 Saotobega Sierra Leone 0.2 1 Sierra Leone Bottling Company South Sudan new new United Beverage Company with Mac (50%) Total 10.5m Hl 15 Source: Deutsche Bank estimates, company reports, IESC
Morocco and Algeria account for the majority of the volume, both markets partial franchises. The Morocco concession came about when Coca Cola pulled the rights from the Castel group in 2003, when the latter purchased Brasseries du Maroc, demonstrating a willingness by Coca Cola to change partners when it suits the circumstances.
Figure 241: ECCBC 2013 country volume split Figure 242: ECCBC volume (million hl) 12.0 Algeria volume CAGR 3yr 5.8% Ghana 10.0 Guinea-Conakry 5yr 6.5% 10yr 8.3% Sierra Leone 8.0
Equitorial Guinea 6.0 Cabo Verde
Gambia Hl Million 4.0 Mauritania Liberia Guinea Bissau Sao Tome & Principe 2.0 Morocco 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Deutsche Bank estimates, company reports Source: Deutsche Bank estimates, company reports, IESC
More interesting to the brewers is the remaining portfolio led by Ghana, which will now have an opportunity to license the SABMiller brands Voltic and Club minerals. Additionally, to the dismay of SABMiller, which developed the first manufacturing facility in the market, ECCBC in 2012 was awarded the Coca Cola franchise in South Sudan in a joint venture with MAC, the Middle Eastern bottling group. It now has an opportunity to take over a soft drink portfolio developed by SABMiller since the birth of that nation.
Deutsche Securities (Pty) Ltd Page 129
4 February 2015
Beverage Beer
Over the past five years, revenue and EBITDA have grown in the high single digits with 2013 revenues at €608 million and EBITDA circa €100 million giving margins of 17%.
Figure 243: ECCBC financial performance 2008-2013
€ 700 € 120 5 Year CAGR € 600 Revenue +9% EBITDA +7% € 100
€ 500 EBITDA ( EBITDA
) € 80 € € 400 € 60
€ 300 € ) Revenue ( Revenue € 40 € 200
€ 100 € 20
€ 0 € 0 2008 2009 2010 2011 2012 2013e
EBITDA (m) revenue (m)
Source: Deutsche Bank estimates, company reports and interviews, IESC
Coca Cola Hellenic’s jewel in Nigeria - 12 million hl in one market Within the 28 markets that constitute Coca Cola Hellenic (CCH.L), the only non-European market that stands out is Nigeria. The so-called Nigerian Bottling Company (NBC) has since 1951 been the cornerstone of the Tarr-Kess group, which remains majority shareholder in CCH. Originally listed on the Nigerian Stock Exchange as part of the indigenization program in the 1970’s, the subsidiary delisted in 2011 amid some local controversy.
Today, we estimate that Nigeria accounts for 9% of CCH revenues but a larger 14% of EBIT (2014DBe €60m). In its last public accounts in 2011, EBITA margins were around 7%. Though the company has gone through a restructuring and SAP implementation program, the margins are in the high single digits, lagging SABMiller and SABCO.
Beyond Nigeria, Coca Cola Hellenic remains an attractive proposition for brewers. For Heineken, Carlsberg and SABMiller, there is a strong overlap of operations. We view both Carlsberg, which already has Coke/beer operations in Scandinavia, and SABMiller as realistic candidates for potential further engagement with CCH.
The markets of Poland, Italy and Greece are of particular interest to the brewers to help reduce the cost base. As Coca Cola has higher pulling power as a “must” stock brand, Russia also provides a platform for better modern trade management, which continues to be the fastest-growing channel in that market for both categories.
Page 130 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The usual headwinds
We have had the pleasure of visiting and working in 37 of the 54 African markets. As Nestle’s CEO once put it, with such diversity, it is almost inevitable that a CNN crew is ever-present. In Africa, each generalization has a multitude of exceptions. In a basket of 54 markets, oil price, commodity cycles and “AOA, Asia Oceania and currency movements have different and often independent rather than Africa- we call it sometimes, interdependent impacts. Core commonalities, however, are appearing – with a little twinkle in the eye, creating a more robust continent. Albeit of a low base, better governance, zone CNN. There is always transparency, infrastructure and agricultural self-sufficiency are becoming the something in the news.” norm.
CEO Nestle The (little) impact of negative commodity cycle October 2013
The ability of beer to withstand commodity headwinds The commodity cycle will impact beer and lower oil prices, but we are sanguine about any potential negative effects. The correlation between the commodity cycle and beer growth is hard to parse. In Nigeria as a heavily dependent oil-exporting country, we see no correlation. If we lag the volume number one year (i.e. the beer volume growth the year after an oil price increase/decline), still no correlation
Figure 244: Nigeria correlation between beer volume Figure 245: Nigeria correlation between beer volume growth and oil price change 1994-2014 yoy growth and oil price change 1994-2014- 1 yr lag 80% 80%
60% 60% R² = 0.0333 R² = 0.0596 40% 40%
20% 20%
0% 0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% y y OPEC crudeprice oil change
y y OPEC crudeprice oil change -20% -20%
-
-
o
o
-
-
y y -40% -40% y-o-y beer volume growth y-o-y beer volume growth
Source: Deutsche Bank, Plato Logic, Datastream Source: Deutsche Bank, Plato Logic, Datastream
In the six years that oil was down, the average decline for oil was 17%, while the beer market grew on average. In 2009, when the oil price declined 35%, beer grew 5%, rising double digits on both sides of that year. It can be argued that the benefits of a high oil price in Nigeria tended to focus on those consumers who had bank accounts in Switzerland. On the way down, those same consumers will be hurt, which most likely has a disproportionate impact on Johnny Walker Black, rather than mainstream Star beer.
Deutsche Securities (Pty) Ltd Page 131
4 February 2015
Beverage Beer
Figure 246: Nigeria beer performance in declining oil Figure 247: year on year changes Nigerian beer market prices and oil price OPEC Oil price avg annual movement Beer annual volume growth 80% 10% OPEC crude
5% 60% Beer volume yoy 5%
0% 40%
-5% 20%
y change y
-
o
- y
-10% 0%
1994 1997 2000 2003 1995 1996 1998 1999 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-15% -20% 2014DBe
-18% -20% -40% x years between 1994-2014- 1997, 1998, 2001, 2009, 2013, 2014 DBe Source: Deutsche Bank, Plato Logic, Datastream Source: Deutsche Bakn, estimates , Datastream, Plato Logic
Zambia’s economy is dependent on copper. Yet over the last 20 years, fluctuations in the copper price seem to have had no direct correlation with beer growth. If we lag the volume number one year (i.e. the beer volume growth the year after a copper price increase/decline), still no correlation.
Figure 248: Zambia correlation between beer volume Figure 249: Zambia correlation between beer volume growth and copper price change 1994-2014 yoy growth and copper price change 1994-2014- 1 yr lag 100% 100%
80% 80%
60% 60% R² = 0.0239 40% R² = 0.0131 40%
20% 20%
0% 0%
y y oil copperchangeprice y copperoil price change
- -
o o -
- -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% y y -20% -20%
-40% -40% y-o-y beer volume growth y-o-y beer volume growth
Source: Deutsche Bank, Plato Logic, Datastream Source: Deutsche Bank, Plato Logic, Datastream
In the nine years that copper was down on average 13%, beer volumes were a mediocre 2%. In the last four copper price declines, however, beer grew 13% annually. The government adjusting excise rates, weather-dependent agricultural outputs as well as SABMiller’s capital investment after many years of under-investment had bigger effects than any copper price decline.
Page 132 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 250: Zambia beer and copper price Pearson Figure 251: year on year changes Zambian beer market correlation 1994-2014 and copper price LME Copper price avg annual movement Beer annual volume growth 100% 15% 13% LME/MT 80% Volume 10% 60% 5% 2% 40% 0% 20% last 9 negative copper price -5% cycles (1996-1999, 2001, 2008, 2009, 2012, 2013) 0%
-10% last 4 negative copper price
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 cycles (2008, 2009, 2012, 2013) -20% 1994 -11% -13% 2014DBe -15% -40%
Nine years between 1994-2014: 1996-1999, 2001, 2008, 2009, 2012, 2013 Source: Deutsche Bank, Plato Logic, Datastream Sourcee: Deutsche Bank, Plato Logic, Datastream
African consumers find beer hard to give up Food and beverages make up over 50% of consumer spending in Emerging Markets. Within Africa, this reaches up to 70% in the low-income group, a key target for beer.
Figure 252: Income spend for EM low income consumers Figure 253: Share of income on food & beverage
Water Utility 80% Personal Care 1%Financial Services ICT2% 0% 70% 3% Education 60% Transport3% 50% Health4% 5% 40% Clothing and 30% Footwear 6% 20% Food and Energy 10% 7% beverage
53% 0%
Mali
Togo
Chad Niger
Others Benin
Kenya
Liberia Ghana Gabon
Malawi
Nigeria
Guinea
Zambia
Burundi
Uganda
Lesotho
Ethiopia
Rwanda Senegal
8% Namibia
Mauritius
Tanzania
Swaziland
Mauritania
Cameroon
Cabo Verde Cabo
South Africa South
Madagascar
Cote d'Ivoire Cote
Congo, Rep. Congo,
Sierra Leone Sierra
Mozambique Gambia, The Gambia, Housing Faso Burkina
8% Congo, Dem. Rep. Dem. Congo,
Principe and Tome Sao Source: Deutsche Bank, World bank Source: Deutsche Bank, World Bank
As consumers enter the cash economy, beer often becomes the first beneficiary, ahead of other HPC and packaged food products. Commercially produced lager replaces the unhygienic and illicit alcohol. Not surprisingly, this seems to have a higher priority for a consumer with a US$1 in his pocket than buying Maggi cubes over salt, or Ritz crackers over homemade (and frankly tastier) plantain chips.
Beer is also one of the last goods that are dropped. It is hard to go back to the homemade stuff. It is also hard socially to revert to the back of the tavern with the flies and the unhygienic products kept there.
Africa GDP remains robust despite commodity headwinds Real GDP growth in Sub-Saharan Africa (SSA) has been gradually accelerating from 2012, and is estimated by the World Bank to have delivered 4.5% in 2014. Excluding South Africa, the estimated growth rate was 5.6%. The economic growth rate of SSA remains steadily above that of both developed (1.8% in 2014) and developing economies (4.4%). Excluding South Africa,
Deutsche Securities (Pty) Ltd Page 133
4 February 2015
Beverage Beer
SSA’s economic growth rate was similar to that of the other ‘high-flying’ region of South Asia (5.6%) but lower than China’s (7.4%).
Incorporating the impact of rapidly lower prices for mining minerals and oil, the World Bank on Wednesday 14th January 2015 forecast that SSA is likely to again deliver marginally higher economic growth in 2015 of 4.9%. Recognizing the risks associated with this forecast emanating from the material decline in both mining mineral and oil prices and a surging US$ exchange rate, the sustainability of SSA’s economic growth rate is remarkable. As per the projections of major countries detailed below, the region’s high growth performance also remains well spread, except for South Africa (structural challenges), Sudan (political) and Zimbabwe (political).
Figure 254: Sub-Saharan Africa economic growth to remain very robust in spite of weaker commodity cycle and FX headwinds
Sub-Saharan Africa 2000-2010 2011 2012 2013 2014E 2015F 2016F 2017F Real GDP growth % YoY Sub-Saharan Africa 5.7 4.3 4.0 4.2 4.5 4.6 4.9 5.1 SSA excl. South Africa 6.6 4.6 4.6 5.1 5.6 5.4 5.7 5.9 Oil exporters 7.7 3.5 3.8 4.8 5.8 5.5 5.6 5.9
Angola 11.3 3.9 8.4 6.8 4.4 5.3 5.0 5.2 Cameroon 3.3 4.1 4.6 5.5 5.1 5.1 4.9 5.1 DRC 4.7 6.9 7.2 8.5 8.0 7.6 7.5 7.3 Ethiopia 8.6 11.2 8.7 10.4 6.7 6.9 6.6 6.7 Ghana 5.8 15.0 8.8 7.1 4.7 4.5 5.5 6.0 Ivory Coast 1.1 -4.7 9.5 8.7 9.1 8.5 8.2 8.0 Kenya 4.4 6.1 4.5 5.7 5.4 6.0 6.6 6.5 Mozambique 7.8 7.3 7.2 7.1 7.2 8.0 8.1 8.2 Nigeria 8.9 4.9 4.3 5.4 6.3 5.5 5.8 6.2 Rwanda 7.9 7.5 7.3 4.6 6.0 6.5 7.0 7.1 South Africa 3.5 3.6 2.5 1.9 1.4 2.2 2.5 2.7 Sudan 6.3 -3.3 -10.1 -6.0 2.6 2.5 2.8 3.0 Tanzania 7.0 6.4 6.9 7.0 7.0 7.2 6.8 7.0 Uganda 7.5 5.0 4.6 5.9 6.3 6.6 6.9 7.0 Zambia 5.6 6.8 7.3 6.4 6.4 6.3 6.5 6.7 Zimbabwe -4.7 11.9 10.6 4.5 3.1 3.2 3.7 3.4
GDP growth components at market prices % YoY Private consumption 5.6 3.6 2.2 12.1 4.4 4.4 4.5 4.7 Public consumption 7.2 7.9 5.2 3.7 3.9 4.4 4.4 4.4 Fixed investment 9.2 -0.6 7.1 4.1 5.1 6.0 6.1 6.2
Consumer prices (annual average) 8.6 10.1 11.3 8.2 8.7
Rest of world 2012 2013 2014E 2015F 2016F 2017F Real GDP growth % YoY World 2.4 2.5 2.6 3.0 3.3 3.2 Developed countries 1.4 1.4 1.8 2.2 2.4 2.2 Developing countries 4.8 4.9 4.4 4.8 5.3 5.4 Source: World Bank, Deutsche Bank
Page 134 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Drivers supporting Africa’s growth momentum
We see four drivers supporting Sub-Saharan Africa’s strong economic growth momentum:
Economies are diversifying African economies are more diversified than what official government statistics have suggested until recently. Rebasing of national accounts has seen, for example, the inclusion of a much larger economic share of services and lower share for mining and oil. For the highlighted countries in Figure 255, services dominate economic activity at around 50% share, followed by agriculture at around 25%. Against common expectations, mining and oil contribute only around 16% (revised down from 24%) of Nigeria’s economic activity.
Figure 255: Sector drivers of real GDP before and after rebasing
100 90 80 70 60 50 40 30 20 10 0 Pre Post Pre Post Pre Post Pre Post Pre Post Ethiopia Ghana Kenya Mozambique Nigeria
Agriculture Mining & oil Industry Services
Source: IMF, Deutsche Bank. Average of 2010-2013.
The economic diversification can be seen in Zambia as a record maize harvest in 2014 more than offset the economic impact of a decline in copper production. In Nigeria a buoyant services sector should limit the decline (on lower oil revenues) of Nigeria’s real GDP growth from 6.3% in 2014 to 5.5% in 2015.
There are also parts of Africa for which the commodity cycle has no relevance. Ethiopia and Rwanda GDP growth have outperformed their more known Asian counterparts, with 11% and 8% CAGR over the last decade, as per Figure 254. The only real commodity in their stable is coffee. Their growth is more a product of good governance and a stable political environment.
Deutsche Securities (Pty) Ltd Page 135
4 February 2015
Beverage Beer
Figure 256: GDP growth in non-commodity/oil markets
500 Ethiopia 2003-2013 CAGR: 11% 450 2013-2019F CAGR: 8%
400 Rwanda 2003-2013 CAGR: 8% 350 2014-2019F CAGR: 7%
300
250
200
150
100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
China Ethiopia India Rwanda Vietnam
Source: Deutsche Bank, IMF World Economic Outlook
Employment still largely exposed to the agricultural sector The average 25% share of agriculture of economic activity under-represents the sector’s share of employment. In other than a handful of relatively developed countries in Africa, the agricultural sector represents more than 40% of total country employment.
Figure 257: Agricultural share of employment in Africa
Agriculture share of employment 0 10 20 30 40 50 60 70 80 90 100 Burkina Faso Chad Madagascar Mozambique Ethiopia Rwanda Tanzania Equatorial Guinea Zambia Mali Uganda Zimbabwe Kenya Niger Cameroon Nigeria Benin Ghana Congo Senegal Botswana Namibia Gabon Mauritius Angola South Africa
Source: Deutsche Bank, World Bank
This has two implications. The first is that lower commodity prices, if they result in retrenchment, should have only a marginal impact on total employment and by implication consumption. This supports the World Bank’s projection that real growth in private consumption will remain stable at 4.4% in 2015.
Page 136 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
The second implication is that higher production and productivity in agriculture are increasingly generating surplus income, moving consumers beyond subsistence farming and into the cash economy. Beer is a prime beneficiary - years with good agricultural yields increase beer sales.
Ongoing fixed investment Investors are buying into the exceptional long-term growth opportunity that Africa offers, and which extends far beyond mineral extraction. The beer market is a good example. Despite weaker commodity prices, the World Bank also projects that real growth in fixed investment into SSA will actually accelerate from an estimated 5.1% in 2014 to 6.0% in 2015.
This investment drive reflects the increasing diversification of African economies. Public infrastructural investment into transportation, electrification, and ports is unlikely to be materially affected by a slowing mining capex cycle.
Remittances from abroad remaining strong Remittances to Africa over the last decades averaged US$22bn per annum, with World Bank estimates that remittances accounted for almost 6% of GDP in low-income countries in 2013 - significantly more than fixed domestic investment. Across developing countries more broadly, remittances have amounted to 60% of FDI flows since 2000. Given that remittances are more sustainable than all other external flows, they help smooth consumption.
Figure 258: Private capital inflows into Sub-Saharan Africa
80
60
40
20
0
-20
-40
Gross FDI Portfolio Inflows Other Inflows Total Gross Inflows
Source: Deutsche Bank, IMF
Deutsche Securities (Pty) Ltd Page 137
4 February 2015
Beverage Beer
Risks to growth
Although we have highlighted four key drivers for the sustainability of Sub- Saharan Africa’s economic growth, the challenges facing the region remain substantial.
Exchange rate risk and by implication inflation Between 2000 and 2013 the market-weighted exchange rates of Sub-Saharan Africa has appreciated in real terms by 28%. This has essentially been driven by the exchange rates of SSA’s oil-producing countries, which saw real appreciation of 82% during this period. Excluding South Africa, which has seen depreciation in real terms, SSA’s middle-income countries have seen their exchange rates appreciate in real terms by a more reasonable 7%, and the low- income and fragile countries by 10%. While the region’s well diversified strong growth should support ongoing gradual exchange rate appreciation in real terms, those of the oil-producing countries are clearly at high risk.
Figure 259: Real effective exchange rates in SSA Figure 260: Consumer prices in SSA (annual average, index year 2000 at 100) (annual average, YoY percentage change) 20.0 190 18.0 170 16.0 14.0 150 12.0 130 10.0 110 8.0 6.0
90 change % YoY CPI Real effective FX rates: FX effective Real
Indexed year 2000 = 100 = 2000 year Indexed 4.0 70 2.0 50 0.0 2000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E
Sub-Saharan Africa Oil-exporting countries Sub-Saharan Africa Oil-exporting countries Middle income countries Middle income excl South Africa Middle income countries Middle income excl South Africa Low income & fragile countries Low income & fragile countries
Source: World Bank, Deutsche Bank Source: World Bank, Deutsche Bank
As is evident from the period during the global financial crisis in 2008, rapid exchange rate depreciation in risk-off trades can have a major inflationary impact. Balancing this is now lower imported inflation and fuel costs. Overall we believe SSA’s sustainable inflation rate remains well entrenched below the 10% level. This should limit the risk of any restrictive monetary policies, although in some instances for country-specific reasons monetary policies can become restrictive, such as Ghana.
Further material weakness in commodity prices Based on the share of mining metals and oils being above 20% of net exports, we identify eight African countries that offer high risk on lower commodity prices. These countries are Equatorial New Guinea (85% share), Congo Brazzaville (61%), Libya (53%), Angola (50%), Gabon (42%), Mauritania (27%), Chad (27%) and Algeria (23%). Other countries with high risk exposure are Zambia (18%), Nigeria (16%), Liberia (14%), Ivory Coast (14%), DRC (13%) and Ghana (12%).
These 14 countries combined contributed 38% (44.7mhl) of African beer consumption in 2013, and excluding South Africa 52%.
Page 138 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Figure 261: The negative commodity cycle: highest-risk markets to beer
Main sources of net exports as % of GDP… …implying where lower commodity prices can impact consumption most
Agriculture Food Metals Energy Total Beer consumption (2013) Volumes % share Risk % share Africa Risk '000 HL of Africa excl. SA Equatorial Guinea 0.8 -3.4 -0.2 87.4 84.6 177 0.2% 0.2% Congo 1.6 -6.3 3.0 62.2 60.5 2,129 1.8% 2.5% Libya -0.3 -6.2 -0.7 60.0 52.7 91 0.1% 0.1% Angola -0.1 -3.3 0.0 53.7 50.2 10,611 9.1% 12.3% Gabon 4.7 -3.0 2.9 37.6 42.3 1,425 1.2% High risk 1.6% High risk Mauritania -0.4 -2.5 36.7 -7.0 26.8 n/a n/a n/a Chad 1.1 -2.1 0.0 27.8 26.7 537 0.5% 38.2% 0.6% 51.7% Algeria -0.4 -4.5 -0.3 28.5 23.3 1,323 1.1% of Africa 1.5% of Africa Zambia 0.6 1.6 19.1 -3.5 17.8 1,337 1.1% volumes 1.5% excl. SA Nigeria 0.1 -1.3 -0.1 17.2 15.9 18,375 15.7% 21.3% volumes Liberia 6.6 -0.9 10.3 -2.0 14.0 198 0.2% 0.2% Côte d'Ivoire 3.6 8.1 -0.3 2.1 13.5 1,971 1.7% 2.3% Dem. Rep. of the Congo 0.2 -3.7 15.2 1.4 13.1 4,668 4.0% 5.4% Ghana 0.4 3.6 0.8 7.1 12.0 1,846 1.6% 2.1% Guinea-Bissau 0.1 12.9 -0.7 -3.8 8.5 102 0.1% 0.1% Guinea 0.2 -3.9 9.7 1.2 7.1 177 0.2% Medium 0.2% Medium Sierra Leone -2.4 9.2 12.7 -14.6 4.9 254 0.2% risk 0.3% risk Cameroon 1.6 -1.6 -0.1 3.9 3.7 6,276 5.4% 7.3% Niger -0.5 -5.8 3.4 6.4 3.5 84 0.1% 6.3% 0.1% 8.6% Sudan 0.1 -2.4 -0.2 6.0 3.4 451 0.4% of volumes 0.5% Seychelles -1.4 20.9 -0.1 -16.9 2.5 57 0.0% 0.1% Benin 3.6 -1.3 1.3 -1.6 2.0 889 0.8% 1.0% Zimbabwe 2.1 -4.1 2.8 0.7 1.5 1,842 1.6% 2.1% Swaziland 6.7 1.6 0.3 -7.4 1.2 247 0.2% 0.3% Namibia 0.0 2.4 3.9 -5.7 0.7 1,262 1.1% 1.5% Rwanda -0.3 -1.9 4.1 -1.4 0.6 1,319 1.1% 1.5% South Africa 0.1 -0.1 6.0 -5.5 0.6 30,625 26.2% n/a Burkina Faso 5.7 -1.1 0.2 -5.6 -0.8 1,126 1.0% 1.3% Madagascar -0.1 -0.2 4.7 -5.5 -1.1 1,103 0.9% 1.3% Uganda 0.1 3.3 -0.3 -4.5 -1.4 3,211 2.7% 3.7% Mali 6.1 -3.2 0.1 -4.9 -1.8 190 0.2% 0.2% Ethiopia 0.3 1.3 -0.1 -3.5 -2.0 3,849 3.3% 4.5% Egypt -0.4 -2.2 -0.5 0.1 -3.1 1,271 1.1% 1.5% Malawi 0.7 1.9 0.4 -6.5 -3.5 295 0.3% 0.3% Mozambique 1.1 -4.5 6.6 -7.4 -4.2 2,176 1.9% 2.5% Kenya 0.9 1.2 -0.1 -7.0 -5.0 5,002 4.3% 5.8% Central African Republic 4.0 -1.8 1.6 -8.8 -5.0 140 0.1% 0.2% Eritrea -0.1 -3.2 -0.1 -2.3 -5.6 n/a n/a n/a Botswana -0.2 -3.2 4.4 -7.6 -6.6 528 0.5% 0.6% Tunisia -0.8 -1.8 -1.2 -3.7 -7.5 1,678 1.4% 1.9% Tanzania 0.6 1.7 1.7 -11.7 -7.7 3,939 3.4% 4.6% Burundi -0.2 -2.6 0.1 -5.1 -7.8 1,749 1.5% 2.0% Gambia 2.9 -11.0 0.8 -2.7 -10.0 36 0.0% 0.0% Morocco -0.6 -0.9 0.3 -10.1 -11.3 813 0.7% 0.9% Djibouti -0.3 -10.3 -0.1 -0.7 -11.4 n/a n/a n/a Mauritius -0.8 -1.6 -0.4 -9.8 -12.6 317 0.3% 0.4% Senegal -0.4 -3.3 0.3 -10.2 -13.6 227 0.2% 0.3% Togo 1.5 0.2 4.4 -20.8 -14.6 574 0.5% 0.7% Comoros -0.4 -13.9 -0.1 -1.2 -15.7 n/a n/a n/a Cabo Verde -0.3 -6.9 -0.1 -10.4 -17.6 134 0.1% 0.2% Sao Tome and Principe -0.4 -7.3 -0.5 -12.8 -21.0 405 0.3% 0.5% Lesotho -0.3 -21.1 -0.5 -12.0 -34.0 n/a n/a n/a 117,037 100.0% 100.0% Legend: Red > 10% GDP Green < -10% GDP Source: IMF, Deutsche Bank
Deutsche Securities (Pty) Ltd Page 139
4 February 2015
Beverage Beer
Elections Elections can be a boost and a risk to the brewers. Pre-election, promises are Figure 262: Africa elections 2015 made, civil servants are paid on time if not before, and election rallies tend to Country Timing include beer. Short term, brewers benefit. Elections have also become normal Burkina Faso November events, often with less skullduggery as recently seen in developed markets. Burundi May/June Chad TBD The biggest event will be Nigeria in February, where North/South tensions and Cote d'Ivoire October the Christian/Muslim divide are resurfacing. The biggest risk for the brewers Ethiopia May would be potential disruption in the Rivers Delta, which history suggests might Guinea TBD occur should the opposition win. This would impact SABMiller with its brewery Mauritius May in Port Hartcourt disproportionally. Presidential elections in Cote d’Ivoire could Niger TBD impact Castel as was the case in the previous round in 2011. Tanzania Nigeria February elections in October may affect the subsequent choice of Finance Minister - in South Sudan July the last cycle the new minister unexpectedly raised excise rates. Sudan April Tanzania October Net, net – we are nuanced about the current headwinds Togo March The configuration of Africa’s economic growth drivers is rapidly changing towards a more diversified basis. Africa’s growth platform is now more robust Zambia January Source: Deutsche Bank than a decade ago, contrary to the perception of most international observers. This by no means implies that the risk level for the region should be underestimated for both external and internal developments. Indeed, headwinds to growth in Africa are common.
Leading international consumer companies, which include the brewers, therefore approach the African market place on a portfolio basis. This offers good risk diversification.
Our key takeaway is illustrated in Figure 263, namely that Sub-Saharan Africa has evolved from a perennial underperformer to not only one of the highest growth regions in the world but also being more resilient during economic shocks. This performance was evident during the global financial crisis of 2008. We think the region will negotiate the slowdown in the commodity cycle in good shape and so support an ongoing attractive beer opportunity.
Figure 263: Africa in a global GDP growth context
10.0
8.0
6.0
4.0
2.0
0.0
% change in GDP growth rate growth in GDP change % -2.0
-4.0
Developing countries (excl. China & India) Developed countries
Sub-Saharan Africa
Source: World Bank, Deutsche Bank
Page 140 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
African exposure
Africa has 20 stocks with significant beer exposure to Africa, most fairly illiquid. In our coverage, of the large caps that we cover we favor and rate both Heineken and SABMiller for the exposure to Africa brewing.
In this section, we have listed the other 17 small capitalized stocks that have direct exposure to Africa.
The investable universe in Africa
Direct exposure, but with risks Figure 264: Brewers of Africa
Investing in the locally listed African subsidiaries is a double-edged sword. SABMiller SAB.L Though all provide immediate access to African consumer growth, the lack of Tanzania Breweries TBL.TZ liquidity, questionable minority rights and an inability to effectively reinvest Zambia Breweries ZABR.LZ earnings locally increases the risk. Though most are related to global brewing National Breweries NATB.LZ groups, there is limited appetite to service the investment community beyond International Breweries IB.LG local shareholders. Frontier funds are often frustrated at the lack of access and Delta DLTA.ZI information. Sechaba Brewery SECH.BT
For the bigger brewing groups, there is limited upside to communicating with Diageo DGE.L the market as long as local stakeholders are informed. Expatriate management East African Breweries EABL.NR time is expensive and it is of greater interest for them to devote their time to Guinness Nigeria GB.LG operations than an aggressive fund knocking on their door. The focus is instead on the local pension funds that hold a stake - they are key to ensuring Heineken HEIN.AS that the community benefits from what is often perceived as a controversial Nigerian Breweries NB.LG product (alcohol). In addition, it also enhances the license to trade. With Bralirwa BLR.RW government pension funds often being the largest shareholders, it is of little interest to see excise increases and the resultant returns diminish. Champion Breweries CB.LG
Bras.Cameroun Par BRCP.PA Figure 265: Local African brewers market capitalization Soboa Par BROA.PA 7,000 Brasseries Du Maroc SBM.CS
6,000 Brass De Tunis SFBT.TN
5,000 Namibia Breweries NBS.NM 4,000 Phoenix Beverages PBL.MZ 3,000 Source: Deutsche Bank 2,000
Market Capitalization (US$ millions) (US$ Capitalization Market 1,000
-
Source: Deutsche Bank, Datastream
Deutsche Securities (Pty) Ltd Page 141
4 February 2015
Beverage Beer
Figure 266: Next 12 months PE of local African brewers
45.0
40.0
35.0
30.0
25.0
20.0 NTM P/E NTM 15.0
10.0
5.0
0.0
Source: Deutsche Bank, Datastream
Figure 267: Share performance in US$ as of Dec 31 2014
USD share price change 12 m 6m 3m 1m SABMiller 2.0% -10.4% -4.4% -2.5% Tanzania Brew eries 61.3% 36.0% -20.9% 1.4% Zambia Brew eries 24.7% 2.1% 2.3% -0.5% National Brew eries 2.4% -2.1% -2.0% -0.5% International Brew eries -27.8% -23.5% -27.8% -18.8% Delta -27.1% -21.5% -20.9% -9.7% Sechaba Brew ery Holdings 36.4% 12.1% 1.4% -2.3% Diageo -13.0% -11.6% 1.1% -6.8% East African Brew eries 1.2% 3.0% 8.6% -0.6% Guinness Nigeria -37.8% -24.6% -29.8% 9.5% Heineken 5.5% -2.4% -3.2% -9.0% Nigerian Brew eries -14.3% -15.1% -16.7% -5.3% Bralirw a -55.6% -17.9% -14.1% 0.0% Champion Brew eries -63.6% -33.3% -33.3% -33.3% Bras.Cameroun Par -39.8% -34.4% -26.5% -19.2% Soboa Par -24.1% -17.4% -16.0% -4.3% Brasseries Du Maroc -10.3% -7.8% -5.2% -4.1% Sc.Frigor Brass De Tunis 67.8% 35.1% 32.9% 1.9% Namibia Brew eries 3.2% 4.6% 9.6% -1.2% Phoenix Beverages 14.5% 12.0% 7.2% 6.9% Source: Deutsche Bank, Datastream
Page 142 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
This page intentionally left blank
Deutsche Securities (Pty) Ltd Page 143
4 February 2015
Beverage Beer
SABMiller listed entities
Listed entities of SABMiller SABMiller has six listed subsidiaries and one associate, Delta beverages. The prime purpose of the listed subsidiaries is to enhance the license to trade and ensure good local corporate citizenship. The main shareholders in each are the local pension funds and quasi-government bodies.
Figure 268: SABMiller listed African entities Figure 269: 2014 US$ return of SABMiller listed entities
250 Tanzania Breweries Limited (TBL.TZ) 230 210 International Breweries (IB.LG) 190 170 Zambian Breweries (ZABR.LZ) 150 130 National Breweries (NATB.LZ) 110 Cervejas de Mozambique (CDM) 90 70
Sechaba (SECH.BT) 50
14
14 14 14
14 14
14 14 14 14 14
14 14
-
- - -
- -
- - - - -
- -
Jul
Apr
Oct
Jan Jan Jun
Mar
Nov
Aug Sep Dec May Delta Corporation (40% associate) May SAB TBL Zambian National International Delta Sechaba
Source: Deutsche Bank Source: Deutsche Bank, Datastream
The average return in US$ in 2014 was 11.6% with an average dividend yield of 4%. Notable was Tanzania Breweries, which is somewhat artificial. The announcement in November of the Tanzanian market to open to international investors caused the TBL share price to spike up and return 88% in local currency, 61% in US$. The share rerated upwardsfrom18X LTM PE to 54X LTM PE as a result.
Figure 270: SABMiller Africa subsidiaries valuations
SAB.L DLTA.ZI TBL.TZ ZABR.LZ SECH.BT NATB.LZ CDM IB.LG UK Zimbabwe Tanzania Zambia Zambia Zambia Mozambique Nigeria Market Cap (Local) 54,207 1,318 4,276,463 3,276 3,739 756 13,833 69,785 Market Cap US$ 82,038 1,318 2,491 497 393 115 420 383 Free Float (%) 59% 60% 42% 30% 50% 26% 3% 22% EV (US$) 96,811 1,298 2,525 548 392 111 482 425 Absolute return (US$) 1 month -2.47% -9.73% 1.37% -0.47% -2.3% -0.47% -6.43% -18.75% Absolute return (US$) 3 month -4.38% -20.93% -20.91% 2.31% 1.4% -1.96% -8.68% -27.78% Absolute return (US$) 12 month 2.04% -27.14% 61.31% 24.67% 36.4% 2.43% -11.91% -27.78% P/E LTM 13.61 13.09 20.06 31.58 18.62 23.08 9.08 20.92 P/E NTM 19.31 13.00 16.98 18.75 17.45 16.22 9.71 37.95 EV/EBITDA NTM 11.41 8.91 5.43 NA 7.78 NA NA EV/EBITDA LTM 9.46 8.52 13.37 7.99 NA 8.60 5.65 Dividend Yield 2.10 3.01 10.37 0.00 5.53 0.00 7.01 1.32 Net Debt/EBITDA 2.62 -0.04 0.13 0.83 NA -0.30 0.70 EBITDA Margin (%) 34.24 30.49 46.21 29.08 NA 21.58 28.36 EBIT Margin (%) 26.57 24.75 40.14 22.85 23.68 18.56 23.13 27.02 EV/HL Sales growth (%) -3.92 -0.66 4.54 13.75 6.58 16.64 -18.61 EPS growth (%) 1.96 -0.70 21.77 68.42 -1.37 42.31 -6.47 EBITDA Margin (%) Estimate 34.36 25.66 36.48 NA 28.57 NA NA 28.41 EBIT Margin (%) Estimate 26.49 19.25 31.12 NA 26.19 NA NA 23.72 Payout ratio (%) 49.60 0.47 66.35 0.00 70.14 0.00 68.38 50.00 ROE (%) 12.83 27.75 38.21 20.50 95.18 55.79 26.56 20.39 Capex/sales (%) 8.89 12.21 -13.75 18.16 NA 16.20 14.58 Capex/depreciation (x) 1.61 2.13 -2.26 2.92 NA 5.36 2.78 Source: Deutsche Bank, company reports, Datastream, Reuters, Bloomberg Finance LP, DB estimates for SABMiller
Page 144 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Mar 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (TZS) Reported EPS (TZS) 543 557 678 744 Tanzania DPS (TZS) 200 300 450 438 Beverage BVPS (TZS) 1385 1687 1890 Weighted average shares ('000) 292 289 292 292 Average market cap (TZSm) 772,713 902,481 2,312,239 3,842,373 Tanzania Breweries Enterprise value (TZSm) 755,139 937,321 2,367,686 3,930,807 Reuters: TBL.TZ Bloomberg: TBL TZ Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 2.9 4.0 6.4 17.7 P/BV (x) 1.15 1.33 2.30 Price (12 Dec 14) TZS 14500 FCF Yield (%) 9.5 17.5 9.5 Dividend Yield (%) 12.6 13.4 10.4 EV/Sales (x) 1.1 1.3 3.2 3.9 52-w eek Range TZS 8000.00 – 19000.00 EV/EBITDA (x) 2.9 3.2 6.9 10.7 Market Cap TZS 4276.4 bn EV/EBIT (x) 3.3 3.6 8.0 12.5 US$ 2.52 bn Income Statement (TZSm) Gross revenue 800,948 892,017 932,132 1,339,220 C o mpany P ro file Excise duties as a % of Gross revenue 16.9% 20.4% 20.4% 24.5% Tanzania Breweries (TBL) is a subsidiary of Net revenue 665,274 709,727 741,977 1,011,379 SABM iller with a c.80% beer market share. In 2011, EBITDA 259,462 295,593 342,858 369,001 EABL terminated its strategic alliance with TBL when Depreciation & Amortisation 27,210 32,995 45,064 54,292 it purchased Serengeti Breweries ending the effective monopoly in the market. Its key focus is beer, with EBIT 232,252 262,598 297,794 314,709 leading brands Safari and Kilimanjaro in mainstream, Net interest income(expense) -79 2,258 438 and Castle Lager, Ndovu, and Castle Lite in premium. Associates/affiliates 0 0 0 It has also installed the capability to produce Exceptionals/extraordinaries -1,060 -9,379 -5,075 international brands from the SABM iller portfolio, Other pre-tax income/(expense) 7,115 -1,664 -438 including Peroni. Additionally, it owns 65% of Profit before tax 238,228 253,813 292,719 Tanzania Distillers, a joint venture with Distell with the leading brand Konyagi Gin. Income tax expense -71,813 -76,685 -89,012 M inorities -7,693 -9,784 -7,339 3yr Price Performance Other post-tax income/(expense) 0 0 2,389 Net profit 158,722 167,344 198,757 208,631 20000
15000 DB adjustments (including dilution)
10000 DB Net profit
5000 Cash Flow (TZSm) 0 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 144,056 215,744 221,926
TBL.TZ Dar Es Salaam Net Capex 99,887 102,727 -101,997 -938,035 Free cash flow 44,169 113,017 119,929 131,575 Equity raised/(bought back) -12,209 9 0 M argin Trends Dividends paid -831 -145,566 -133,685 Net inc/(dec) in borrowings -10,244 -10,343 -52,850 50 Other investing/financing cash flows -78,846 -118,194 -110,714 40 Net cash flow 41,926 -58,350 -75,323 30 Change in working capital -125,761 -83,648 221,926 20 10 0 Balance Sheet (TZSm) 2012 2013 2014 2015E Cash and other liquid assets 100,509 49,442 11,090 EBITDA M argin EBIT M argin Tangible fixed assets 363,298 425,680 474,670 Goodwill/intangible assets 40,943 49,343 48,981 Growth & Profitability Associates/investments 88 88 88
40 46 Other assets 183,982 213,787 242,180 35 44 Total assets 688,820 738,340 777,009 30 25 42 Interest bearing debt 76,865 73,599 56,892 20 40 15 38 Other liabilities 206,845 177,139 167,514 10 5 36 Total liabilities 283,710 250,738 224,406 0 34 Shareholders' equity 399,040 476,919 542,958 2012 2013 2014 2015E M inorities 6,070 10,683 9,645 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 405,110 487,602 552,603 Net debt -23,644 24,157 45,802 Solvency Key Company Metrics 10 800 8 700 Sales growth (%) 28.9 6.7 4.5 36.3 6 600 4 500 2 EPS growth (%) 45.6 2.5 21.8 9.7 0 400 -2 300 EBITDA M argin (%) 39.0 41.6 46.2 36.5 -4 200 -6 100 EBIT M argin (%) 34.9 37.0 40.1 31.1 -8 0 2012 2013 2014 Payout ratio (%) 36.8 53.9 66.3 58.9 Return on Average Equity (%) 43.9 37.5 38.2 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 26.2 23.5 Capex/sales (%) 15.0 14.5 -13.7 -92.7 Net debt/equity (%) -5.8 5.0 8.3 Net interest cover (x) NA 116.3 679.9
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 145
4 February 2015
Beverage Beer
Tanzania Breweries Limited Tanzania Breweries (TBL) is a subsidiary of SABMiller with c.80% beer market Figure 271: TBL shareholders share. In 2011, EABL terminated its strategic alliance with TBL, when it purchased Serengeti Breweries, ending the effective monopoly in the market. Other 27% Its key focus is beer, with leading brands Safari and Kilimanjaro in mainstream, SABMiller The Govt of Africa and Castle Lager, Ndovu, and Castle Lite in premium. It also has the ability to the United 58% Republic of Tanzania produce international brands from the SABMiller portfolio, including Peroni. 4% Parastatal Additionally, it owns 65% of Tanzania Distillers, a joint venture with Distell with Pension Fund 5% the leading brand Konyagi Gin. It recently purchased DarBrew - a sorghum Ingawa Industries beer producer it had originally sold in 1998. This will give the company an Limited 6% opportunity to expand into the sorghum beer market. Source: Deutsche Bank, company reports
Figure 272: TBL.TZ EBITDA in local currency Figure 273: EBITDA in US$
400,000 48% 250 48%
350,000 46% 46% 200 300,000
44% 44% EBITDA EBITDA margin 250,000 EBIT margin 150 42% 42% 200,000 40% 40% 100 150,000
38% 38% EBITDA (TZSm) EBITDA
100,000 (USDm) EBITDA 50 50,000 36% 36%
0 34% 0 34% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 274: Price and volume in local currency Figure 275: LTM P/E multiple
20000 3000 33.0 18000 2500 16000 28.0 14000 2000 12000 23.0 10000 1500 18.0 8000 1000 6000 13.0 4000 500 2000 8.0 0 0
3.0
Volume mn (RH Axis) Share price (TZS)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 276: Share performance in US$ 12 m 6m 3m 1m Tanzania Breweries 51.4% 41.2% -21.7% -15.9% Source: Deutsche Bank, Datastream
Page 146 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Mar 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (ZM K) Reported EPS (ZM K) 0.2 0.2 0.3 Zambia DPS (ZM K) Beverage BVPS (ZM K) 1.5 1.4 1.7 Weighted average shares (m) 444 546 546 Average market cap (ZM Km) 1,447 1,813 2,703 Zambian Breweries Enterprise value (ZM Km) 1,685 2,165 3,016 Reuters: ZABR.LZ Bloomberg: ZABR ZL Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 15.5 14.7 12.3 P/BV (x) 1.7 2.0 2.3 Price (12 Dec 14) ZMK 6.00 FCF Yield (%) -9.0 0.3 2.7 Dividend Yield (%) EV/Sales (x) 1.8 1.9 2.3 52-w eek Range ZMB 4.20 – 6.00 EV/EBITDA (x) 6.9 6.7 8.0 Market Cap ZMK 3,276m EV/EBIT (x) 9.9 8.9 10.2 US$ 497m Income Statement (ZMKm) Gross revenue 1,179 1,444 1,646 C o mpany P ro file Excise duties as a % of Gross revenue 22.1% 21.0% 21.1% Owned 87% by SABM iller, Zambian breweries has c. Net revenue 919 1,141 1,298 85% market share in the clear beer sector, with leading EBITDA 243 324 377 brands M osi and Castle Lager. The company benefitted Depreciation & Amortisation 73 80 81 from the excise reductions in 2009 and 2010 from 75% to 60% and 40% respectively. However, in 2014 the EBIT 170 244 297 government partially reversed its stance and raised Net interest income(expense) -53 -77 -46 excise back to 60%The company also produces the full Associates/affiliates 0 0 0 portfolio of Coca Cola Brands, though these Exceptionals/extraordinaries -1 10 0 operations are slated to be folded into the newly formed Other pre-tax income/(expense) 6 -21 0 Coca Cola Beverages Africa JV. Profit before tax 121 157 251 Income tax expense -49 -52 -76 M inorities 0 0 0 3yr Price Performance Other post-tax income/(expense) 0 0 0
7000 7 Net profit 72 105 175 6000 6 5000 5 DB adjustments (including dilution) 4000 4 DB Net profit 3000 3 2000 2 1000 1 0 0 Cash Flow (ZMKm) Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Cash flow from operations 225 269 293
LUSE ZABR.LZ (RHS) Net Capex 324 265 236 Free cash flow -99 4 58 Equity raised/(bought back) 351 0 0 M argin Trends Dividends paid 0 0 0 Net inc/(dec) in borrowings -44 -62 -80 35 30 Other investing/financing cash flows -362 -320 -256 25 Net cash flow 170 -113 -43 20 15 Change in working capital -2 -6 -8 10 5 0 Balance Sheet (ZMKm) 2012 2013 2014 Cash and other liquid assets 142 40 43 EBITDA M argin EBIT M argin Tangible fixed assets 924 1,080 1,223 Goodwill/intangible assets 72 79 77 Growth & Profitability Associates/investments 0 0 0
30 25 Other assets 281 381 455 25 20 Total assets 1,419 1,580 1,798 20 15 Interest bearing debt 380 392 356 15 10 10 Other liabilities 379 423 495 5 5 Total liabilities 759 815 851 0 0 Shareholders' equity 660 765 947 2012 2013 2014 M inorities 0 0 0
Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 660 765 947 Net debt 239 352 313 Solvency Key Company Metrics 50 0 40 -1 Sales growth (%) 17.6 24.1 13.7 -2 30 -3 EPS growth (%) 45.5 18.8 68.4 20 -4 EBITDA M argin (%) 26.4 28.4 29.1 -5 10 -6 EBIT M argin (%) 18.5 21.4 22.9 0 -7 2012 2013 2014 Payout ratio (%) 0.0 0.0 0.0 Return on Average Equity (%) 16.0 14.8 20.5 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 5.9 7.0 10.4 Capex/sales (%) 35.2 23.2 18.2 Net debt/equity (%) 36.2 46.0 33.1 Net interest cover (x) -3.2 -3.2 -6.5
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 147
4 February 2015
Beverage Beer
Zambian Breweries Owned 87% by SABMiller, Zambian breweries has c. 85% market share in the Figure 277: ZBL shareholders clear beer sector, with leading brands Mosi and Castle Lager. The company Saturnia Regna Other Pension Trust 2% Standard Limited benefitted from the excise reductions in 2009 and 2010 from 75% to 60% and Chartered Zambia 1% Securities Nominees Ltd 40%, respectively. However, in 2014 the government partially reversed its 10% stance and raised the excise back to 60% In 2012, it fully refurbished the Ndola plant, increasing its capacity from 1ml hl to 1.75ml hl. The company also produces the full portfolio of Coca Cola brands, though these operations are slated to be folded into the newly formed Coca Cola Beverages Africa JV. SABMiller Africa 87%
Source: Deutsche Bank, company reports
Figure 278: EBITDA in local currency Figure 279: EBITDA in US$
400,000 30% 70000 30%
29% 29% 350,000 60000 29% 29% 300,000
50000 EBITDA EBITDA margin 28% EBITDA margin 28% 250,000 28% 40000 28% 200,000 27% 30000 27% 150,000 27% 27% 20000 100,000
26% 26%
EBITDA (ZMK '000) (ZMK EBITDA EBITDA (USD '000) (USD EBITDA 10000 50,000 26% 26%
0 25% 0 25% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 280: Price and volume in local currency Figure 281: LTM P/E multiple
7 450 33 400 6 31 350 29 5 300 27 4 250 25 3 200 23 150 2 100 21 1 50 19
0 0 17
15
Volume mn (RH Axis) Share price (ZMK)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 282: Share performance in US$ 12 m 6m 3m 1m Zambia Breweries 26.3% 3.4% 2.1% 5.2% Source: Deutsche Bank, Datastream
Page 148 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Mar 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (ZM K) Reported EPS (ZM K) 0.6 0.5 0.7 Zambia DPS (ZM K) 0.3 Beverage BVPS (ZM K) 0.5 0.9 1.7 Weighted average shares (m) 63 63 63 Average market cap (ZM Km) 504 520 625 National Breweries Enterprise value (ZM Km) 495 0 730 Reuters: NATB.LZ Bloomberg: NABR ZL Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 12.9 15.9 13.4 P/BV (x) 15.37 8.69 5.86 Price (12 Dec 14) ZMK 12.00 FCF Yield (%) 8.5 0.5 1.6 Dividend Yield (%) 3.9 EV/Sales (x) 2.0 0.0 1.9 52-w eek Range ZMK 10.16 – 12.00 EV/EBITDA (x) 8.0 0.0 8.6 Market Cap ZMK 756m EV/EBIT (x) 9.1 0.0 10.0 US$ 115m Income Statement (ZMKm) Gross revenue 276 374 429 C o mpany P ro file Excise duties as a % of Gross revenue 9.7% 9.8% 8.3% National Breweries in Zambia is effectively owned Net revenue 249 337 394 70% by SABM iller and is the leading producer of EBITDA 61 63 85 opaque sorghum beer, accounting for c 50% of the Depreciation & Amortisation 7 10 12 market. Its leading brand is Chibuku, and recent innovations include Super Chibuku, the first opaque EBIT 54 53 73 beer in clear PET bottles. It has recently benefitted Net interest income(expense) 1 1 1 from a ban on spirits sold in sachet format. Annual Associates/affiliates 0 0 0 performance is highly correlated to the clear beer Exceptionals/extraordinaries 1 0 4 price as well as annual agricultural output. Other pre-tax income/(expense) -1 -1 -4 Profit before tax 55 52 74 Income tax expense -19 -20 -27 M inorities 0 0 0 3yr Price Performance Other post-tax income/(expense) 0 0 0
7000 13 Net profit 35 32 46 6000 12 5000 11 DB adjustments (including dilution) 4000 10 DB Net profit 3000 9 2000 8 1000 7 0 6 Cash Flow (ZMKm) Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 57 43 74
LUSE NATB.LZ (RHS) Net Capex 17 40 64 Free cash flow 39 3 10 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -23 -1 0 Net inc/(dec) in borrowings 0 0 0 30 25 Other investing/financing cash flows -17 -38 -61 20 Net cash flow 16 4 13 15 Change in working capital -5 -20 -8 10 5 0 Balance Sheet (ZMKm) 2012 2013 2014 Cash and other liquid assets 9 13 26 EBITDA M argin EBIT M argin Tangible fixed assets 46 73 122 Goodwill/intangible assets 0 1 2 Growth & Profitability Associates/investments 0 0 0
40 140 Other assets 25 48 77 120 30 Total assets 80 135 227 100 20 80 Interest bearing debt 0 0 0 10 60 Other liabilities 50 75 121 40 0 20 Total liabilities 50 75 121 -10 0 Shareholders' equity 30 60 107 2012 2013 2014 M inorities 0 0 0
Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 30 60 107 Net debt -9 -13 -26 Solvency Key Company Metrics 0 120 -5 100 Sales growth (%) -4.4 35.3 16.6 -10 80 -15 EPS growth (%) -5.1 -7.1 42.3 60 -20 EBITDA M argin (%) 24.7 18.7 21.6 -25 40 -30 20 EBIT M argin (%) 21.8 15.7 18.6 -35 0 2012 2013 2014 Payout ratio (%) 50.0 0.0 0.0 Return on Average Equity (%) 118.0 72.7 55.8 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 43.8 30.3 25.7 Capex/sales (%) 6.8 11.9 16.2 Net debt/equity (%) -31.0 -21.7 -24.1 Net interest cover (x) 98.4 95.7 81.9
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 149
4 February 2015
Beverage Beer
National Breweries Zambia National Breweries in Zambia is effectively owned 70% by SABMiller and is the Figure 283: NBL shareholders leading producer of opaque sorghum beer, accounting for c 50% of the Saturnia Regna Other Pension Trust 9% Fund market. Its leading brand is Chibuku, and recent innovations include Super 3% Public Service Pension Fund Chibuku, the first opaque beer in clear PET bottles. It has recently benefitted 8%
Standard from a ban on spirits sold in sachet format. Annual performance is highly Chartered Securities Nominees Ltd correlated to the clear beer price as well as annual agricultural output. 10%
Heinrich Syndicate Limited (SABMiller) 70%
Source: Deutsche Bank, company reports
Figure 284: EBITDA in local currency Figure 285: EBITDA in US$
90,000 30% 14000 30%
80,000 13500 25% 25% 70,000
13000 EBITDA EBITDA margin 60,000 20% 20% EBITDA margin
50,000 12500 15% 15% 40,000 12000
30,000 10% 10% 11500 EBITDA (K '000) (K EBITDA 20,000 5% '000) (USD EBITDA 5% 11000 10,000
0 0% 10500 0% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 286: Price and volume in local currency Figure 287: LTM P/E multiple
14.0 600000 24 23 12.0 500000 22 10.0 400000 21 8.0 300000 20 6.0 19 200000 4.0 18 2.0 100000 17
0.0 0 16
15
Volume mn (RH Axis) Share price (ZMK)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 288: Share performance in US$ 12 m 6m 3m 1m National Breweries 3.8% -1.0% -2.1% 0.8% Source: Deutsche Bank, Datastream
Page 150 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Mar 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (M ZN) Reported EPS (M ZN) 10 13 12 Mozambique DPS (M ZN) 5.72 8 8 Beverage BVPS (M ZN) 37.9 42.2 45.9 Weighted average shares (m) 114 122 122 Average market cap (M ZNm) NA 13,833 13,833 Cervejas de Mozambique Enterprise value (M ZNm) NA 14,595 15,781 Reuters: CDM Bloomberg: CDM.MZ Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 0.0 9.1 9.8 P/BV (x) 0.00 2.69 2.49 Price (12 Dec 14) MZN 113.60 FCF Yield (%) NA 5.7 2.8 Dividend Yield (%) 7.0 7.0 EV/Sales (x) NA 52-w eek Range MT 113.60 – 125.00 EV/EBITDA (x) NA 5.2 5.6 Market Cap MT 13,833m EV/EBIT (x) NA 6.4 6.9 US$ 420m Income Statement (MZNm) Gross revenue 7,807 9,062 9,852 C o mpany P ro file Excise duties as a % of Gross revenue CDM (the pink brewery, because it ran out of paint) is Net revenue owned 79% by SABM iller and has c. 90% market EBITDA 2,473 2,829 2,794 share of clear beer, with leading brands 2M , Depreciation & Amortisation 545 564 516 Laurentina Preta and M anica. After completion of the Nampula brewery, it launched Impala, the first EBIT 1,928 2,265 2,278 cassava beer tapping into the value segment. The Net interest income(expense) -336 -71 -169 share has the liquidity of the Sahara. It recently added Associates/affiliates 0 0 0 a spirits portfolio to its operations and should benefit Exceptionals/extraordinaries 0 -1 1 from the integration with the recently formed Other pre-tax income/(expense) -79 -43 -16 Coca Cola Beverages Africa. Profit before tax 1,512 2,150 2,094 Income tax expense -429 -626 -669 M inorities 0 0 0 2yr Price Performance Other post-tax income/(expense) 0 0 0 Net profit 1,083 1,524 1,425 60000 130 50000 125 DB adjustments (including dilution) 40000 120 30000 DB Net profit 20000 115 110 10000 Cash Flow (MZNm) 0 105 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 Cash flow from operations 1,661 1,815 1,825
J SE CDM .M Z (RHS) Net Capex 787 1,032 1,437 Free cash flow 874 783 388 Equity raised/(bought back) 1,090 0 0 M argin Trends Dividends paid -864 -697 -974 Net inc/(dec) in borrowings -1,783 0 0 35 30 Other investing/financing cash flows 25 2 -599 25 Net cash flow -658 88 -1,186 20 15 Change in working capital 2 -488 -68 10 5 0 Balance Sheet (MZNm) 2012 2013 2014 Cash and other liquid assets 65 102 227 EBITDA M argin EBIT M argin Tangible fixed assets 4,724 5,103 6,337 Goodwill/intangible assets 286 286 481 Growth & Profitability Associates/investments 0 0 0
0 35 Other assets 1,261 2,263 2,258 30 Total assets 6,337 7,754 9,304 -5 25 20 Interest bearing debt 915 864 2,175 -10 15 Other liabilities 1,109 1,751 1,538 -15 10 5 Total liabilities 2,024 2,614 3,713 -20 0 Shareholders' equity 4,313 5,140 5,591 2012 2013 2014 M inorities 0 0 0 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 4,313 5,140 5,591 Net debt 850 762 1,947 Solvency Key Company Metrics 40 0 35 -5 Sales growth (%) -11.2 -18.7 -18.6 30 -10 25 -15 EPS growth (%) 25.1 31.3 -6.5 20 15 -20 EBITDA M argin (%) 31.7 31.2 28.4 10 -25 5 -30 EBIT M argin (%) 24.7 25.0 23.1 0 -35 2012 2013 2014 Payout ratio (%) 60.0 63.9 68.4 Return on Average Equity (%) 31.0 32.2 26.6 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 17.5 21.6 16.7 Capex/sales (%) 10.1 11.4 14.6 Net debt/equity (%) 19.7 14.8 34.8 Net interest cover (x) -5.7 -31.8 -13.5
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 151
4 February 2015
Beverage Beer
Cervejas de Mozambique CDM (the pink brewery, because it ran out of paint) is owned 79% by Figure 289: NBL shareholders
SABMiller and has c. 90% market share of clear beer, with leading brands 2M, Moçambique Others Investimentos Government of 11% Limitada Mozambique Laurentina Preta and Manica. After completion of the Nampula brewery, it 1% 2% launched Impala, the first cassava beer tapping into the value segment. The Instituto Nacional SABMiller de Segurança Social Africa BV share has the liquidity of the Sahara. It recently added a spirits portfolio to its 2% 79%
SPI SARL operations and should benefit from the integration with the recently formed 5% Coca Cola Beverages Africa. The company also produces the full portfolio of Coca Cola Brands, though these operations are to be folded into the newly formed Coca Cola Beverages Africa JV.
Source: Deutsche Bank, company reports
Figure 290: EBITDA in local currency Figure 291: EBITDA in US$
2,900 32% 93 32%
2,800 92 31% 31%
2,700 91 EBITDA EBITDA margin 30% EBITDA margin 30%
2,600 90 29% 29% 2,500 89
28% 28%
EBITDA (MTm) EBITDA 2,400 88 EBITDA (BWPm)EBITDA 27% 27% 2,300 87
2,200 26% 86 26% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 292: Price and volume in local currency Figure 293: LTM P/E multiple
126 14 124 12 122
120 10
118 8 116 6 114
112 4 110 2 108
106 0
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Page 152 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Mar 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (BWP) Reported EPS (BWP) 1.2 1.5 1.4 1.5 Botswana DPS (BWP) 0.7 1.0 1.0 1.3 Beverage BVPS (BWP) 1.7 2.1 2.6 2.8 Weighted average shares (m) 133 133 133 133 Average market cap (BWPm) 1,611 2,184 2,864 3,738 Sechaba Breweries Enterprise value (BWPm) 1,610 2,156 2,856 3,735 Reuters: SECH.BT Bloomberg: SCHB BG Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 9.7 10.0 12.7 18.7 P/BV (x) 6.90 6.89 7.16 10.07 Price (12 Dec 14) BWp 2811.00 FCF Yield (%) -1.0 -0.9 -0.5 Dividend Yield (%) 5.6 7.0 5.5 4.7 EV/Sales (x) 52-w eek Range BWp 1903.00 – 2811.00 EV/EBITDA (x) 4.4 4.8 NA 7.8 Market Cap BWP 3,739m EV/EBIT (x) 4.9 5.4 6.5 8.5 US$ 393m Income Statement (BWPm) Gross revenue 1,565 1,747 1,862 1,680 C o mpany P ro file Excise duties as a % of Gross revenue SABM iller owns 50% of Sechaba breweries, which is Net revenue the leading producer of clear beer, opaque sorghum EBITDA 365 451 0 480 beer and Coca Cola Beverages. In beer it has 80% Depreciation & Amortisation 37 48 -441 40 market share, with leading brand St. Louis, Carling Black Label and Castle Lager. The governments EBIT 329 403 441 440 introduced an alcohol levy in 2008, which has Net interest income(expense) 10 6 0 subsequently been increased to 45% causing a shift Associates/affiliates 0 0 0 to higher alcohol beers. The opaque sorghum beer Exceptionals/extraordinaries 0 0 0 market is led by Chibuku, though zoning legislation Other pre-tax income/(expense) -3 -10 -5 and the restrictions in selling outlets has resulted in Profit before tax 335 399 436 430 reduced sales Income tax expense -54 -76 -85 M inorities -119 -136 -159 3yr Price Performance Other post-tax income/(expense) 0 7 159
10000 3000 Net profit 162 194 351 360 2500 9500 DB adjustments (including dilution) 2000 9000 1500 DB Net profit 8500 1000 8000 500 7500 0 Cash Flow (BWPm) Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Cash flow from operations 305 330 -12
Botswana Stock Exchange SECH.BT Net Capex 85 79 n/a Free cash flow -16 -17 -12 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -136 -129 -128 Net inc/(dec) in borrowings 78 -19 0 30 25 Other investing/financing cash flows -155 -201 121 20 Net cash flow 92 -18 -20 15 Change in working capital -16 -17 -12 10 5 0 Balance Sheet (BWPm) 2012 2013 2014 2015E Cash and other liquid assets 57 66 8 EBITDA M argin EBIT M argin Tangible fixed assets 398 422 0 Goodwill/intangible assets 0 0 0 Growth & Profitability Associates/investments 0 0 0
25 120 Other assets 360 391 371 20 100 Total assets 815 880 379 15 10 80 Interest bearing debt 85 94 0 5 60 0 40 Other liabilities 413 389 40 -5 -10 20 Total liabilities 498 482 40 -15 0 Shareholders' equity 228 283 340 2012 2013 2014 2015E M inorities 89 114 0
Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 317 397 340 371 Net debt 28 28 -8 100 Solvency Key Company Metrics 30 70 25 60 Sales growth (%) 22.6 11.6 6.6 -9.8 20 50 15 40 EPS growth (%) 20.1 -1.4 4.2 10 30 EBITDA M argin (%) 23.3 25.8 28.6 5 20 0 10 EBIT M argin (%) 21.0 23.1 23.7 26.2 -5 0 2012 2013 2014 2015E Payout ratio (%) 54.3 69.9 70.1 88.0 Return on Average Equity (%) 54.1 54.2 95.2 101.3 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 21.8 22.8 55.7 Capex/sales (%) 5.5 4.5 Net debt/equity (%) 8.9 6.9 -2.4 26.9 Net interest cover (x) 34.2 65.0
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 153
4 February 2015
Beverage Beer
Sechaba Breweries Botswana SABMiller owns 50% of Sechaba breweries, the leading producer of clear beer, Figure 294: Sechaba shareholders opaque sorghum beer and Coca Cola Beverages. In beer it has 80% market Botswana Other Development Corp share, with leading brand St. Louis (developed in 1984 after the Managing 17% 26% Frank Russell Trust Comp Director at the time visited Anheuser Busch), Carling Black Label and Castle 2% Motor Vehic Accident Fund Lager. The government introduced an alcohol levy in 2008, which has 5% subsequently been increased to 45%, causing a shift to higher alcohol beers. The opaque sorghum beer market is led by Chibuku, though zoning legislation
SABMiller Africa and the restrictions on selling outlets have resulted in reduced sales. 50%
Source: Deutsche Bank, company reports
Figure 295: EBIT in local currency Figure 296: EBIT in US$
500 24% 51.0 24%
450 24% 50.0 24%
400 23% 49.0 23%
350 EBITDA EBITDA margin 23% EBITDA margin 48.0 23% 300 22% 47.0 22% 250 22% 46.0 22% 200 21% 45.0 21%
150
EBITDA (USDm) EBITDA EBITDA (BWPm)EBITDA 100 21% 44.0 21%
50 20% 43.0 20%
0 20% 42.0 20% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 297: Price and volume in local currency Figure 298: LTM P/E multiple
3000 2500000 25
2500 2000000 20 2000 1500000 15 1500 1000000 1000 10
500000 500 5 0 0
0
Volume mn (RH Axis) Share price (BWp)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 299: Share performance in US$ 12 m 6m 3m 1m Sechaba Brewery Holdings 39.8% 13.9% -0.7% -2.6% Source: Deutsche Bank, Datastream
Page 154 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Mar 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS ($) Reported EPS ($) 6.22 8.55 8.49 Zimbabwe DPS ($) 0.02 0.03 0.04 0.03 Beverage BVPS ($) 0.22 0.28 0.33 0.37 Weighted average shares (m) 1,192 1,227 1,231 1,231 Average market cap (US$m) 811 1,411 1,416 1,342 Delta Corporation Enterprise value (US$m) 842 1,422 1,409 1,348 Reuters: DLTA.ZI Bloomberg: DLTA ZH Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 0.1 0.1 0.2 P/BV (x) 3.35 3.11 4.02 2.99 Price (12 Dec 14) USD 1.06 FCF Yield (%) 1.9 4.8 3.8 Dividend Yield (%) 2.7 3.5 3.0 3.1 EV/Sales (x) 1.8 2.6 2.6 2.3 52-w eek Range USD 1.02 – 1.42 EV/EBITDA (x) 7.1 8.8 8.5 8.9 Market Cap EV/EBIT (x) 8.6 10.5 10.5 11.9 US$ 1,318m Income Statement (US$m) Gross revenue 555 631 626 C o mpany P ro file Excise duties as a % of Gross revenue 13.5% 13.5% 13.3% Delta Beverages can be considered an independent Net revenue 480 546 542 590 brewer, although SABM iller has a 40% share and the EBITDA 119 162 165 151 M anaging Director of Delta sits on the SABM iller Depreciation & Amortisation 20 27 31 38 board. The company has c. 98% market share in beer, with Castle Lager and Lion Lager the leading brands. EBIT 98 135 134 114 Following the dollarization of the Zimbabwe economy, Net interest income(expense) -1 2 6 the company has recovered volumes from previous Associates/affiliates 2 2 2 highs in 1999 and has benefitted from additional Exceptionals/extraordinaries -2 -3 0 capacity investment. It is also the bottler of Coca Cola Other pre-tax income/(expense) 2 0 -2 products and in 2009 acquired a controlling stake in Profit before tax 99 137 140 125 Schweppes. Additionally, it produces opaque sorghum beer, with Chibuku the leading brand and PET-based Income tax expense -24 -33 -33 Super Chibuku recently launched. M inorities -1 -2 -2 3yr Price Performance Other post-tax income/(expense) -1 0 0
250 2.0 Net profit 73 102 106 97 200 1.6 DB adjustments (including dilution) 150 1.2 DB Net profit 100 0.8 50 0.4 0 0.0 Cash Flow (US$m) Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 90 134 129
ZSE DLTA.ZI (RHS) Net Capex 74 84 66 46 Free cash flow 16 50 63 70 Equity raised/(bought back) 2 0 -4 M argin Trends Dividends paid -22 -29 -43 Net inc/(dec) in borrowings 57 -3 -7 35 30 Other investing/financing cash flows -77 -83 -63 25 Net cash flow 50 20 11 20 15 Change in working capital -35 -42 -39 10 5 0 Balance Sheet (US$m) 2012 2013 2014 2015E Cash and other liquid assets 56 75 86 EBITDA M argin EBIT M argin Tangible fixed assets 268 319 353 Goodwill/intangible assets 0 0 0 Growth & Profitability Associates/investments 28 31 35
40 35 Other assets 115 137 145 30 30 Total assets 467 562 620 25 20 20 Interest bearing debt 81 79 71 10 15 Other liabilities 117 136 134 10 0 5 Total liabilities 198 215 206 -10 0 Shareholders' equity 264 341 406 2012 2013 2014 2015E M inorities 5 7 8
Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 269 347 414 449 Net debt 31 10 -7 Solvency Key Company Metrics 14 100 12 10 50 Sales growth (%) 37.4 13.7 -0.7 8.8 8 6 0 EPS growth (%) 38.2 37.5 -0.7 4 -50 2 EBITDA M argin (%) 24.7 29.7 30.5 25.7 0 -100 -2 EBIT M argin (%) 20.5 24.7 24.7 19.2 -4 -150 2012 2013 2014 Payout ratio (%) 0.3 0.4 0.5 Return on Average Equity (%) 30.5 33.2 27.7 22.3 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 18.0 19.9 17.9 Capex/sales (%) 15.4 15.3 12.2 7.8 Net debt/equity (%) 11.5 3.0 -1.7 Net interest cover (x) -106.3 71.7 22.2
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 155
4 February 2015
Beverage Beer
Delta Beverages Zimbabwe Delta Beverages can be considered an independent brewer, although Figure 300: Delta shareholders SABMiller has a 40% share and the Managing Director of Delta sits on the Other Stanbic SABMiller board. The company has c. 98% market share in beer, with Castle 25% Nominees (Pvt.) Ltd. NNR Lager and Lion Lager the leading brands. Following the dollarization of the 24% Zimbabwe economy, the company has recovered volumes from previous highs in 1999 and has benefitted from additional capacity investment. It is also the Old Mutual Life Assurance Co bottler of Coca Cola products and in 2009 acquired a controlling stake in 11%
Schweppes. Additionally, it produces opaque sorghum beer, with Chibuku the SABMiller Zimbabwe BV leading brand and PET-based Super Chibuku recently launched. 40%
Source: Deutsche Bank, company reports
Figure 301: EBITDA in US$ Figure 302: EBIT in US$
180 35% 160 30% 160 30% 140 25% 140 25% 120 120 EBITDA margin 20% 100 EBIT margin 100 20% 80 15% 80 15%
60 (USm) EBIT 60 10% 10% EBITDA (USDm) EBITDA 40 40 5% 5% 20 20
0 0% 0 0% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 303: Price and volume in local currency Figure 304: LTM P/E multiple
1.8 8000000 20 1.6 7000000 18 1.4 6000000 16 1.2 14 5000000 1 12 4000000 0.8 10 3000000 0.6 8 2000000 0.4 6 1000000 0.2 4
0 0 2
0
Volume mn (RH Axis) Share price (USD)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 305: Share performance in US$ 12 m 6m 3m 1m Delta -22.1% -6.8% -16.8% -3.5% Source: Deutsche Bank, Datastream
Page 156 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
This page intentionally left blank
Deutsche Securities (Pty) Ltd Page 157
4 February 2015
Beverage Beer
Diageo listed subsidiaries
Listed subs of Diageo Diageo has three listed subsidiaries in Africa, though Guinness Ghana is barely liquid. Guinness Nigeria and East African Breweries Limited are some of the most liquid stocks in Africa north of Johannesburg.
Figure 306: Diageo listed African entities Figure 307: 2014 US$ return of Diageo listed entities
120 110
100
90 Guinness Ghana (GGBL. GH) 80 70
Guinness Breweries (GB.LG) 60
50 East African Breweries Limited (EABL.NR) 40
30
14
14 14 14
14 14
14 14 14 14 14
14 14
-
- - -
- -
- - - - -
- -
Jul
Apr
Oct
Jan Jan Jun
Mar
Nov
Aug Sep Dec
May May DGE Guinness Nigeria EABL
Source: Deutsche Bank Source: Deutsche Bank, Datastream
The average return in US$ in 2014 was -18.3% with an average dividend yield of 1.7%.
Figure 308: Valuations key figures of Diageo Africa subsidiaries
DGE.L EABL.NR GB.LG UK Kenya Nigeria Market Cap (Local) 46,743 245,140 195,765 Market Cap US$ 70,722 2,686 1,075 Free Float (%) 100% 50% 46% EV (US$) 86,727 3,092 1,290 Absolute return (US$) 1 month -6.79% -0.58% 9.52% Absolute return (US$) 3 month 1.05% 8.63% -29.77% Absolute return (US$) 12 month -13.01% 1.19% -37.84% P/E LTM 19.32 31.02 19.67 P/E NTM 18.45 25.20 16.89 EV/EBITDA NTM 13.80 13.32 9.80 EV/EBITDA LTM 15.11 13.24 13.65 Dividend Yield 2.70 1.89 1.44 Net Debt/EBITDA 2.28 1.96 1.26 EBITDA Margin (%) 36.68 29.57 24.12 EBIT Margin (%) 30.55 24.28 14.40 EV/HL Sales growth (%) -9.25 3.78 -10.83 EPS growth (%) -2.26 -7.03 -19.92 EBITDA Margin (%) Estimate 35.94 31.20 24.18 EBIT Margin (%) Estimate 29.99 25.45 16.26 Payout ratio (%) 57.63 67.07 50.39 ROE (%) 32.82 74.13 21.02 Capex/sales (%) 6.26 11.32 12.79 Capex/depreciation (x) 1.02 2.14 1.32
Source: Deutsche Bank,Company Reports, Datastream, Reuters, Bloomberg Finance LP, DB estimates for Diageo
Page 158 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 30-Jun 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS Reported EPS (KES) 13 9 8 11 Kenya DPS (KES) 8.8 8.9 5.5 7.1 Beverage BVPS (KES) 8.3 8.7 11.4 16.6 Weighted average shares (m) 791 791 792 792 Average market cap (m) 180,297 268,863 227,743 246,166 East African Breweries Enterprise value (m) 207,504 299,268 263,322 281,509 Reuters: EABL.NR Bloomberg: EABL.KN Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 12.6 30.1 35.5 29.6 P/BV (x) 20.55 30.51 25.51 18.77 Price (12 Dec 14) KES 306.00 FCF Yield (%) 0.1 0.8 -0.3 Dividend Yield (%) 5.1 3.4 1.9 2.3 EV/Sales (x) 3.7 5.1 4.3 4.2 52-w eek Range KES 208.00 – 329.00 EV/EBITDA (x) 11.6 16.8 14.5 13.6 Market Cap KES 245,140 m EV/EBIT (x) 14.0 20.2 17.7 16.6 US$ 2,686 m Income Statement (KESm) Gross revenue 89,847 C o mpany P ro file Excise duties as a % of Gross revenue 38.2% Diageo owns 50.2% of East African Breweries in Net revenue 55,522 59,062 61,292 66,568 Kenya, and includes operations in Uganda, Tanzania, EBITDA 17,957 17,825 18,121 20,772 and exports to South Sudan, Burundi and Rwanda. In Depreciation & Amortisation 3,125 2,977 3,237 3,829 Kenya, the company has c. 95% market share with leading brand Tusker. Recent excise changes have EBIT 14,832 14,848 14,884 16,943 markedly reduced the volumes of Senator Lager. In Net interest income(expense) -3,628 -3,885 -4,259 Uganda, the company has c.45%market share, led by Associates/affiliates 0 0 0 0 Bell Lager. In Tanzania, it has c. 20% share, gained Exceptionals/extraordinaries -3,960 0 0 from the purchase of Serengeti Breweries in 2009. It Other pre-tax income/(expense) 8,010 151 -218 also distributes and produces spirits brands in the Profit before tax 15,253 11,115 10,407 13,520 region. Income tax expense -4,067 -4,593 -3,548 M inorities -543 241 -360 3yr Price Performance Other post-tax income/(expense) 0 215 0 Net profit 10,644 6,979 6,499 8,569 6000 450 400 5000 350 DB adjustments (including dilution) 4000 300 250 3000 DB Net profit 200 2000 150 100 1000 50 Cash Flow (KESm) 0 0 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 6,835 8,303 6,193
Nairobi Stoc k Ex c hange EABL.KN (RHS) Net Capex 6,696 6,693 6,941 5,478 Free cash flow 138 1,610 -747 944 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -6,649 -6,026 -4,267 Net inc/(dec) in borrowings 21,150 -9 10,029 35 30 Other investing/financing cash flows -15,512 -267 -785 25 Net cash flow -872 -4,693 4,230 20 15 Change in working capital -10,713 8,303 6,193 10 5 0 Balance Sheet (KESm) 2012 2013 2014 2015E Cash and other liquid assets 998 1,406 1,101 EBITDA M argin EBIT M argin Tangible fixed assets 31,247 33,715 37,255 Goodwill/intangible assets 4,401 4,564 4,575 Growth & Profitability Associates/investments 10 10 10
25 90 Other assets 17,928 18,860 19,925 80 20 70 Total assets 54,584 58,556 62,866 60 15 50 Interest bearing debt 26,031 31,086 36,598 10 40 30 Other liabilities 19,837 19,036 17,167 5 20 10 Total liabilities 45,868 50,122 53,765 0 0 Shareholders' equity 6,541 6,874 9,019 2012 2013 2014 2015E M inorities 2,175 724 82 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 8,716 8,434 9,101 Net debt 25,033 29,680 35,497 30,537 Solvency Key Company Metrics 500 -3 400 -3 Sales growth (%) 23.7 6.4 3.8 8.6 -3 300 EPS growth (%) 44.7 -34.5 -7.0 28.0 -4 200 -4 EBITDA M argin (%) 32.3 30.2 29.6 31.2 100 -4 EBIT M argin (%) 26.7 25.1 24.3 25.5 0 -4 2012 2013 2014 Payout ratio (%) 65.0 100.9 67.1 67.3 Return on Average Equity (%) 59.8 81.4 74.1 77.1 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 20.4 12.3 10.7 Capex/sales (%) 12.1 11.3 11.3 8.2 Net debt/equity (%) 287.2 351.9 390.0 Net interest cover (x) -4.1 -3.8 -3.5
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 159
4 February 2015
Beverage Beer
East African Breweries Limited Diageo owns 50.2% of East African Breweries in Kenya, and includes Figure 309: EABL shareholders operations in Uganda, Tanzania, and exports to South Sudan, Burundi and
Rwanda. In Kenya, the company has c. 95% market share with leading brand Diageo Tusker. Recent excise changes have markedly reduced the volumes of Senator 47%
Other Lager. In Uganda, the company has c. 45% market share, led by Bell Lager. In 46% Tanzania, it has c. 20% share, gained from the purchase of Serengeti
Breweries in 2009. It also distributes and produces spirits brands in the region. Aberdeen Asset Management 2% FIL Limited Guinness 2% Overseas 3% Source: Deutsche Bank, company reports
Figure 310: EBITDA in local currency Figure 311: EBITDA in US$
18,150 33% 214.0 33% 18,100 33% 33% 212.0 18,050 32% 32%
18,000 32% 32% EBITDA EBITDA margin EBITDA EBITDA margin 210.0 17,950 31% 31%
17,900 31% 208.0 31%
17,850 30% 30% 206.0
17,800 30% 30%
EBITDA (KESm) EBITDA EBITDA (USDm) EBITDA 17,750 29% 29% 204.0 17,700 29% 29%
17,650 28% 202.0 28% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 312: Price and volume in local currency Figure 313: LTM P/E multiple
450 7000000 43.0
400 6000000 38.0 350 5000000 33.0 300 4000000
250 3000000 28.0
200 2000000 23.0 150 1000000 18.0 100 0
13.0
Volume mn (RH Axis) Share price (KES)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 314: Share performance in US$ 12 m 6m 3m 1m East African Breweries 0.6% 4.6% 7.9% 3.0% Source: Deutsche Bank, Datastream
Page 160 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 30-Jun 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (NGN) Reported EPS (NGN) 9.6 7.9 6.4 6.9 Nigeria DPS (NGN) 8.0 7.0 3.2 4.8 Beverage BVPS (NGN) 27.4 30.6 29.9 33.5 Weighted average shares (m) 1,475 1,506 1,506 1,506 Average market cap (NGNm) 336,283 378,083 301,178 184,637 Guinness Nigeria (Diageo) Enterprise value (NGNm) 348,225 395,995 334,257 211,352
Reuters: GUINNES.LG Bloomberg: GUINNESS NL Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 23.3 33.1 34.9 17.7 P/BV (x) 8.21 8.60 7.41 3.66 Price (12 Dec 14) NGN 130.00 FCF Yield (%) 2.3 2.5 0.4 Dividend Yield (%) 3.6 2.7 1.4 3.9 EV/Sales (x) 2.8 3.2 3.1 1.8 52-w eek Range NGN 115.00 – 239.00 EV/EBITDA (x) 15.2 12.8 12.7 7.6 Market Cap NGN 195,765m EV/EBIT (x) 20.3 19.0 21.3 11.2 US$ 1,075m Income Statement (NGNm) Gross revenue C o mpany P ro file Excise duties as a % of Gross revenue Diageo own 54%of Guinness Nigeria, which has c.20% Net revenue 126,288 122,464 109,202 115,701 market share in beer. The Guinness FES brand has c. EBITDA 22,907 30,981 26,343 27,981 60% of the Stout market which accounts for c. 20 of Depreciation & Amortisation 5,746 10,098 10,620 9,168 beer; Harp Lager has c. 10% of the lager market, which accounts for c. 60% of beer; and Guinness M alta EBIT 17,161 20,883 15,723 18,813 dominates the non-alcoholic beer market. In 2011, the Net interest income(expense) -1,513 -3,605 -4,442 company underwent an expandsion program and now Associates/affiliates 0 0 0 should have c. 8mhl of capcity available. The company Exceptionals/extraordinaries -126 -24 0 also manufactures and distributes a portfolio of spirits, Other pre-tax income/(expense) 4,861 -245 400 including the recently launched local bitter Orijin. Profit before tax 20,383 17,009 11,682 14,208 Nigeria is the No. 1market for Guinness by sales value in the world for Diageo. Income tax expense -6,169 -5,145 -2,108 M inorities 0 0 0 3yr Price Performance Other post-tax income/(expense) 456 0 0
2500 300 Net profit 14,671 11,864 9,573 10,924 250 2000 DB adjustments (including dilution) 200 1500 150 DB Net profit 1000 100 500 50 0 0 Cash Flow (NGNm) Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 21,224 24,298 15,069
Nigerian Stoc k ex c hange GUINNES.LG (RHS) Net Capex 13,530 14,330 13,967 9,134 Free cash flow 7,694 9,968 1,226 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -14,071 -4,275 -10,849 Net inc/(dec) in borrowings -1,153 -2,537 11,901 30 25 Other investing/financing cash flows -14,237 -17,889 -13,952 20 Net cash flow -8,237 -402 2,169 15 Change in working capital -7,257 -8,115 19,157 10 5 0 Balance Sheet (NGNm) 2012 2013 2014 2015E Cash and other liquid assets 4,772 3,189 6,291 EBITDA M argin EBIT M argin Tangible fixed assets 76,294 88,113 90,683 Goodwill/intangible assets 680 579 608 Growth & Profitability Associates/investments 0 0 0
10 40 Other assets 20,788 32,244 38,023 35 Total assets 102,534 124,125 135,605 5 30 0 25 Interest bearing debt 16,714 21,101 39,370 20 -5 15 Other liabilities 45,467 56,985 51,173 -10 10 5 Total liabilities 62,181 78,086 90,543 -15 0 Shareholders' equity 40,353 46,039 45,062 2012 2013 2014 2015E M inorities 0 0 0
Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 40,353 46,039 45,062 50,492 Net debt 11,942 17,912 33,079 27,093 Solvency Key Company Metrics 80 0 70 -2 Sales growth (%) 2.1 -3.0 -10.8 6.0 60 50 -4 EPS growth (%) -20.7 -17.7 -19.9 9.1 40 -6 30 -8 EBITDA M argin (%) 18.1 25.3 24.1 24.2 20 10 -10 EBIT M argin (%) 13.6 17.1 14.4 16.3 0 -12 2012 2013 2014 2015E Payout ratio (%) 83.0 88.3 50.4 69.3 Return on Average Equity (%) 36.4 27.5 21.0 22.9 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 15.1 10.5 7.4 Capex/sales (%) 10.7 11.7 12.8 7.9 Net debt/equity (%) 29.6 38.9 73.4 53.7 Net interest cover (x) -11.3 -5.8 -3.5
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 161
4 February 2015
Beverage Beer
Guinness Nigeria Diageo owns 54% of Guinness Nigeria, which was established in 1963 and has Figure 315: GN shareholders c. 20% market share in beer. The Guinness FES brand has c. 60% of the Stout Guinness market, which accounts for c. 20% share of beer; Harp Lager has c. 10% of the Overseas Limited lager market, which accounts for c. 60% of beer; and Guinness Malta 46%
Other dominates the non-alcoholic beer market. In 2011, the company underwent an 46% expansion program and now should have c. 8mhl of capacity available. The company also manufactures and distributes a portfolio of spirits, including the recently launched local bitter Orijin. Nigeria is the No. 1 market for Guinness by Atalantaf sales value in the world for Diageo. Limited 8% Source: Deutsche Bank, company reports
Figure 316: EBITDA in local currency Figure 317: EBITDA in US$
35,000 30% 250.00 30%
30,000 25% 25% 200.00
25,000 EBITDA EBITDA margin 20% EBITDA margin 20% 150.00 20,000 15% 15% 15,000 100.00 10% 10%
10,000
EBITDA (USDm) EBITDA EBITDA (NGNm) EBITDA 50.00 5% 5% 5,000
0 0% 0.00 0% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 318: Price and volume in local currency Figure 319: LTM P/E multiple
300 6000 40
250 5000 35
30 200 4000 25 150 3000 20 100 2000 15
50 1000 10
0 0 5
0
Volume mn (RH Axis) Share price (NGN)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 320: Share performance in US$ 12 m 6m 3m 1m Guinness Nigeria -59.6% -40.9% -38.7% -30.9% Source: Deutsche Bank, Datastream
Page 162 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
This page intentionally left blank
Deutsche Securities (Pty) Ltd Page 163
4 February 2015
Beverage Beer
Heineken listed subsidiaries
Listed entities of Heineken The most liquid brewing stock on the continent north of Johannesburg in Africa is Nigerian Breweries. Recently, approval has been granted in Nigeria to merge Heineken’s majority-owned subsidiaries, Nigerian Breweries and Consolidated breweries.
Heineken’s other listed subsidiary, Bralirwa, basically created the Rwandan stock exchange. It became the first listed entity when the stock exchange opened in January 2011 and is up 284% in local currency, 231% in US$ since that time - a CAGR in TSR of 35%.
Figure 321: Heineken listed African entities Figure 322: 2014 US$ return of Heineken listed entities
140
120
100
80 Nigerian Breweries (NB.LG) 60 Champion Breweries (CB.LG) 40 Bralirwa (BLR.RW) 20
0
14
14 14 14
14 14
14 14 14 14 14
14 14
-
- - -
- -
- - - - -
- -
Jul
Apr
Oct
Jan Jan Jun
Mar
Nov
Aug Sep Dec
May May
Heineken Nigerian breweries Bralirwa Champion Source: Deutsche Bank Source: Deutsche Bank, Datastream
The average return in US$ in 2014 was -55% with an average dividend yield of 2.2%.
Figure 323: Valuations key figures of Heineken Africa subsidiaries
HEIN.AS NB.LG BLR.RW CB.LG
Market Cap (Local) 34,059 1,092,055 390,857 49,464 Market Cap US$ 4,249 5,997 558 272 Free Float (%) 50% 46% 43% EV (US$) 56,525 6,185 575 270 Absolute return (US$) 1 month -8.98% -5.26% 0.00% -33.33% Absolute return (US$) 3 month -3.19% -16.67% -14.06% -33.33% Absolute return (US$) 12 month 5.47% -14.29% -55.65% -63.64% P/E LTM 19.57 22.56 23.60 49.42 P/E NTM 17.58 19.26 19.99 43.93 EV/EBITDA NTM 9.69 7.98 9.62 NA EV/EBITDA LTM 9.45 14.38 8.19 96.99 Dividend Yield 1.69 2.84 1.85 -44.26 Net Debt/EBITDA 2.61 -0.01 0.44 -0.77 EBITDA Margin (%) 21.84 33.34 34.49 6.97 EBIT Margin (%) 13.60 25.25 27.91 -24.35 EV/HL Sales growth (%) 4.46 6.31 1.98 25.09 EPS growth (%) -4.58 10.68 -18.76 -12.08 EBITDA Margin (%) Estimate 22.55 32.56 48.87 NA EBIT Margin (%) Estimate 14.38 24.73 30.03 NA Payout ratio (%) 37.52 78.95 24.95 390.87 ROE (%) 11.79 41.86 47.42 29.31 Capex/sales (%) 7.53 12.33 -24.71 -41.42 Capex/depreciation (x) 1.15 1.52 -3.76 -1.32 Source: Deutsche Bank, Company Reports, Datastream, Reuters, Bloomberg Finance LP, DB estimates for Heineken
Page 164 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Dec 2011 2012 2013 2014E
Running the Numbers Financial Summary Africa DB EPS (N) Reported EPS (N) 5.0 5.2 5.7 5.7 Nigeria DPS (N) 3.0 3.0 4.5 5.2 Beverage BVPS (N) 10.2 12.2 14.7 16.3 Weighted average shares (m) 7,653 7,653 7,653 7,653 Average market cap (Nm) 714,057 1,111,718 1,269,778 1,098,163 Nigerian Breweries Enterprise value (Nm) 739,304 1,147,203 1,269,249 1,116,032 Reuters: NB.LG Bloomberg: NB NL Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 15.8 21.0 27.8 25.0 P/BV (x) 7.70 8.86 10.80 8.80 Price (12 Dec 14) NGN 144.40 FCF Yield (%) 6.1 2.2 5.1 Dividend Yield (%) 3.8 2.8 2.8 EV/Sales (x) 3.2 4.5 4.7 3.9 52-w eek Range NGN 128.50 – 189.00 EV/EBITDA (x) 11.4 14.3 14.2 11.8 Market Cap NGN 1,092.0 bn EV/EBIT (x) 13.1 18.1 18.7 15.6 US$ 6.0 bn Income Statement (Nm) Gross revenue C o mpany P ro file Excise duties as a % of Gross revenue Owned 54% by Heineken, Nigerian Breweries was Net revenue 230,123 252,674 268,614 289,767 established in 1946 and is the largest brewery in EBITDA 64,624 80,469 89,568 94,358 Nigeria. It acquired Sona breweries in 2011and in 2014 Depreciation & Amortisation 8,261 17,227 21,741 22,707 announced its intent to merge with Consolidated Breweries. The company will have c. 70% market EBIT 56,363 63,242 67,827 71,651 share in beer following the amalgamation. Its leading Net interest income(expense) 1 -8,308 -6,157 brands are Star and Gulder in mainstream, Legend in Associates/affiliates 0 0 0 Stout, 33 Export in the value segment, and M altina in Exceptionals/extraordinaries 0 0 -774 the non-alcoholic malt segment. Other pre-tax income/(expense) 34 690 1,344 Profit before tax 56,398 55,624 62,240 67,318 Income tax expense -18,347 -17,582 -19,160 M inorities -2 0 0 3yr Price Performance Other post-tax income/(expense) -25 0 0 Net profit 38,023 38,043 43,080 45,749 2500 200
2000 150 DB adjustments (including dilution) 1500 100 DB Net profit 1000 500 50 Cash Flow (Nm) 0 0 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 54,329 55,889 95,168
Nigerian Stoc k Ex c hange NB.LG (RHS) Net Capex 9,230 37,897 33,125 28,184 Free cash flow 36,698 17,992 62,043 51,314 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -9,904 -21,665 -21,756 Net inc/(dec) in borrowings 47,000 -2,000 -36,000 40 35 Other investing/financing cash flows -82,168 -44,478 -37,397 30 25 Net cash flow -9,256 -12,254 15 20 Change in working capital -17,490 -26,272 4,019 15 10 5 0 Balance Sheet (Nm) 2011 2012 2013 2014E Cash and other liquid assets 21,876 9,514 9,529 EBITDA M argin EBIT M argin Tangible fixed assets 123,180 142,348 153,366 Goodwill/intangible assets 54,367 53,988 53,563 Growth & Profitability Associates/investments 150 150 150
30 70 Other assets 16,798 47,634 39,340 25 60 Total assets 216,372 253,634 255,948 20 50 40 Interest bearing debt 47,108 45,000 9,000 15 30 Other liabilities 91,213 115,186 134,589 10 20 5 10 Total liabilities 138,321 160,186 143,589 0 0 Shareholders' equity 78,035 93,448 112,359 2011 2012 2013 2014E M inorities 16 0 0 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 78,051 93,448 112,359 124,816 Net debt 25,232 35,486 -529 -7,927 Solvency Key Company Metrics 50 0 40 -2 Sales growth (%) 23.8 9.8 6.3 7.9 30 -4 EPS growth (%) 25.4 3.6 10.7 0.7 20 -6 10 -8 EBITDA M argin (%) 28.1 31.8 33.3 32.6 0 -10 EBIT M argin (%) 24.5 25.0 25.3 24.7 -10 -12 2011 2012 2013 2014E Payout ratio (%) 60.4 58.3 78.9 90.2 Return on Average Equity (%) 59.3 44.4 41.9 38.6 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 23.0 16.2 16.9 Capex/sales (%) 4.0 15.0 12.3 9.7 Net debt/equity (%) 32.3 38.0 -0.5 -6.4 Net interest cover (x) NA -7.6 -11.0
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 165
4 February 2015
Beverage Beer
Nigerian Breweries Owned 54% by Heineken, Nigerian Breweries was established in 1946 and is Figure 324: NB shareholders the largest brewery in Nigeria. It acquired Sona breweries in 2011 and in 2014 Heineken announced its intent to merge with Consolidated Breweries. The company will 38% have c. 70% market share in beer following the amalgamation. Its leading Other brands are Star and Gulder in mainstream, Legend in Stout, 33 Export in the 42% value segment, and Maltina in the non-alcoholic malt segment.
FIL Limited 1% Oppenheimer Distilled Funds Inc Trading 3% International 16% Source: Deutsche Bank, company reports
Figure 325: EBITDA in local currency Figure 326: EBITDA in US$
100,000 34% 600 34%
90,000 33% 33% 500 80,000 32% 32%
70,000 EBITDA EBITDA margin 31% EBITDA margin 400 31% 60,000 30% 30% 50,000 300 29% 29% 40,000 28% 200 28%
30,000
EBITDA (USDm) EBITDA EBITDA (NGNm) EBITDA 20,000 27% 27% 100 10,000 26% 26%
0 25% 0 25% 2011 2012 2013 2011 2012 2013
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 327: Price and volume in local currency Figure 328: LTM P/E multiple
200.0 70000 40
180.0 60000 35 50000 160.0 40000 30 140.0 30000
120.0 25 20000
100.0 10000 20 80.0 0
15
Volume mn (RH Axis) Share price (NGN)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 329: Share performance in US$ 12 m 6m 3m 1m Nigerian Breweries -20.8% -25.2% -25.9% -15.8% Source: Deutsche Bank, Datastream
Page 166 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Dec 2011 2012 2013 2014E
Running the Numbers Financial Summary Africa DB EPS (RWF) Reported EPS (RWF) 29 37 30 17 Rwanda DPS (RWF) 24.2 20 7.5 8.07 Beverage BVPS (RWF) 38.3 58.4 68.4 32.3 Weighted average shares (m) 514 514 514 1,029 Average market cap (RWFm) 85,628 162,000 215,743 370,304 Bralirwa Enterprise value (RWFm) 82,596 158,639 221,672 392,429 Reuters: BLR.RW Bloomberg: BLR.RW Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 4.3 5.4 13.5 21.2 P/BV (x) 3.18 3.40 5.91 11.16 Price (12 Dec 14) RWF 380.00 FCF Yield (%) 19.3 9.1 -3.9 Dividend Yield (%) 19.9 10.1 1.9 2.2 EV/Sales (x) 1.3 2.1 2.8 4.6 52-w eek Range RWF 350.00 – 465.00 EV/EBITDA (x) 3.5 5.3 8.2 9.4 Market Cap RWF 390, 857m EV/EBIT (x) 4.2 6.3 10.1 15.3 US$ 558m Income Statement (RWFm) Gross revenue C o mpany P ro file Excise duties as a % of Gross revenue Founded in1957, Heineken owns 75% of Bralirwa, Net revenue 64,958 76,979 78,503 85,469 listed as the first stock on the Rwanda Stock EBITDA 23,621 29,690 27,077 41,767 Exchange in 2009. It is the leading beverage company Depreciation & Amortisation 3,761 4,468 5,165 16,097 in Rwanda with c. 95% market share in beer. Its top brands include Primus, M utzig and Amstel, and it EBIT 19,860 25,222 21,912 25,670 licenses Guinness for production from Diageo. Net interest income(expense) -173 -404 -674 Additionally, it is the sole bottler of the Coca Cola Associates/affiliates 0 0 0 portfolio with c. 99% share in sparkling beverages. Exceptionals/extraordinaries 318 43 83 Other pre-tax income/(expense) 0 0 0 Profit before tax 20,005 24,861 21,320 24,215 Income tax expense -5,347 -5,834 -5,862 M inorities 0 0 0 3yr Price Performance Other post-tax income/(expense) 0 0 0 Net profit 14,658 19,027 15,459 17,466 6000 500 5000 400 DB adjustments (including dilution) 4000 300 3000 DB Net profit 200 2000 100 1000 Cash Flow (RWFm) 0 0 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 19,491 32,160 11,324
Nairobi Stoc k Ex c hange BRL.RW (RHS) Net Capex -7,408 -22,853 -19,401 -16,946 Free cash flow 12,083 9,307 -8,077 13,751 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -11,085 -8,692 -10,286 Net inc/(dec) in borrowings -23 3,000 2,364 60 50 Other investing/financing cash flows 306 43 -217 40 Net cash flow 1,281 3,658 -16,216 30 Change in working capital -4,104 2,684 -15,573 20 10 0 Balance Sheet (RWFm) 2011 2012 2013 2014E Cash and other liquid assets 6,064 9,722 2,558 EBITDA M argin EBIT M argin Tangible fixed assets 21,980 40,452 54,688 Goodwill/intangible assets 87 0 0 Growth & Profitability Associates/investments 60 9 9
25 160 Other assets 21,699 24,343 34,281 140 Total assets 49,890 74,527 91,537 20 120 15 100 Interest bearing debt 0 3,000 14,416 80 10 60 Other liabilities 30,212 41,514 41,935 5 40 20 Total liabilities 30,212 44,514 56,350 0 0 Shareholders' equity 19,678 30,013 35,186 2011 2012 2013 2014E M inorities 0 0 0 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 19,678 30,013 35,186 Net debt -6,064 -6,722 11,858 15,023 Solvency Key Company Metrics 40 0 30 -20 Sales growth (%) 23.0 18.5 2.0 8.9 20 -40 10 -60 EPS growth (%) 41.9 29.8 -18.8 -43.5 0 -10 -80 EBITDA M argin (%) 36.4 38.6 34.5 48.9 -20 -100 -30 -120 EBIT M argin (%) 30.6 32.8 27.9 30.0 -40 -140 2011 2012 2013 Payout ratio (%) 84.9 54.1 25.0 47.5 Return on Average Equity (%) 149.0 76.6 47.4 51.1 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 58.8 30.6 18.6 Capex/sales (%) -11.4 -29.7 -24.7 -19.8 Net debt/equity (%) -30.8 -22.4 33.7 Net interest cover (x) -114.8 -62.4 -32.5
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 167
4 February 2015
Beverage Beer
Bralirwa Breweries Rwanda Founded in1957, Heineken owns 75% of Bralirwa, listed as the first stock on Figure 330: Bralirwa shareholders the Rwanda Stock Exchange in 2009. It is the leading beverage company in
Other Rwanda with c. 95% market share in beer. Its top brands include Primus, 25% Mutzig and Amstel, and it licenses Guinness for production from Diageo. Additionally, it is the sole bottler of the Coca Cola portfolio with c. 99% share in sparkling beverages. Heineken 75%
Source: Deutsche Bank, company reports
Figure 331: EBITDA in local currency Figure 332: EBITDA in US$
35,000 39% 50.0 39% 45.0 30,000 38% 38% 40.0
25,000 37% 35.0 37%
EBITDA EBITDA margin EBITDA EBITDA margin 30.0 20,000 36% 36% 25.0 15,000 35% 35% 20.0
10,000 34% 15.0 34%
EBITDA (USDm) EBITDA EBITDA (RWFm)EBITDA 10.0 5,000 33% 33% 5.0
0 32% 0.0 32% 2011 2012 2013 2011 2012 2013
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 333: Price and volume in local currency Figure 334: LTM P/E multiple
500 12000000 35 450 10000000 30 400 350 8000000 25 300 250 6000000 20 200 4000000 15 150 100 2000000 10 50 0 0 5
0
Volume mn (RH Axis) Share price (RWF)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 335: Share performance in US$ 12 m 6m 3m 1m Bralirwa -57.9% -19.7% -17.2% 1.9% Source: Deutsche Bank, Datastream
Page 168 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Dec 2011 2012 2013 2014E
Running the Numbers Financial Summary Africa DB EPS (NGN) Reported EPS (NGN) -2 -1 -1 0 Nigeria DPS (NGN) -2.3 -3.8 -5.1 -5.0 Beverage BVPS (NGN) 3.97 3.58 11.57 0 Weighted average shares (m) 900 900 900 907 Average market cap (NGNm) 3,627 3,735 15,219 5,975 Champion Breweries Enterprise value (NGNm) 3,711 3,741 15,100 5,582
Reuters: CHAMPIO.LG Bloomberg: CHAMPION.NL Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) -2.0 -2.4 -8.8 43.9 P/BV (x) 1.00 1.00 1.00 Price (12 Dec 14) NGN 6.87 FCF Yield (%) -1.4 2.2 1.3 Dividend Yield (%) -56.8 -106.5 -44.3 -75.4 EV/Sales (x) 2.1 2.1 6.8 2.0 52-w eek Range NGN 2.71 – 16.51 EV/EBITDA (x) -7.8 -8.7 97.0 Market Cap NGN 49,464m EV/EBIT (x) -2.6 -3.1 -27.8 US$ 272m Income Statement (NGNm) Gross revenue C o mpany P ro file Excise duties as a % of Gross revenue Founded in 1997, Heineken, though Ryasun, owns Net revenue 1,791 1,785 2,233 2,725 57%, having bought the shares from the Sona group EBITDA -477 -431 156 in 2011. The company serves the Akwa Ibom State Depreciation & Amortisation 927 782 700 near the Cameroonian border. Its leading brand is Champion Lager beer. EBIT -1,404 -1,213 -544 Net interest income(expense) -517 -707 -1,187 Associates/affiliates 0 0 0 Exceptionals/extraordinaries 0 -9 0 Other pre-tax income/(expense) 0 0 0 Profit before tax -1,921 -1,929 -1,730 Income tax expense 95 592 552 M inorities 0 0 0 3yr Price Performance Other post-tax income/(expense) 0 0 0 Net profit -1,826 -1,337 -1,178 136 2500 25 2000 20 DB adjustments (including dilution) 1500 15 DB Net profit 1000 10 500 5 Cash Flow (NGNm) 0 0 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 174 157 1,058
NSE CHAM PIO.NL (RHS) Net Capex -226 -85 -925 Free cash flow -51 72 133 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid 0 0 0 Net inc/(dec) in borrowings 0 0 0 20 0 Other investing/financing cash flows 0 0 0 -20 Net cash flow -16 72 125 -40 Change in working capital 761 663 824 -60 -80 -100 Balance Sheet (NGNm) 2011 2012 2013 Cash and other liquid assets 31 27 119 EBITDA M argin EBIT M argin Tangible fixed assets 5,163 5,657 7,240 Goodwill/intangible assets 1,172 0 12 Growth & Profitability Associates/investments 0 0 0
30 70 Other assets 706 1,115 1,767 25 60 Total assets 7,071 6,799 9,138 20 50 15 40 Interest bearing debt 115 32 0 10 5 30 Other liabilities 8,986 10,197 13,746 0 20 -5 10 Total liabilities 9,101 10,229 13,746 -10 0 Shareholders' equity -2,030 -3,430 -4,608 2011 2012 2013 2014E M inorities 0 0 0 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity -2,030 -3,430 -4,608 Net debt 84 6 -119 Solvency Key Company Metrics 3 3 2 3 Sales growth (%) -4.4 -0.3 25.1 22.0 1 0 2 EPS growth (%) 48.2 -26.6 -12.1 -111.5 -1 2 -2 1 EBITDA M argin (%) -26.6 -24.1 7.0 -3 -4 1 EBIT M argin (%) -78.4 -68.0 -24.4 -5 0 2011 2012 2013 Payout ratio (%) 111.1 255.8 390.9 Return on Average Equity (%) 66.3 49.0 29.3 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) -37.0 -19.3 -14.8 Capex/sales (%) -12.6 -4.8 -41.4 Net debt/equity (%) -4.2 -0.2 2.6 Net interest cover (x) 2.7 1.7 0.5
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 169
4 February 2015
Beverage Beer
Champion Breweries Nigeria Founded in 1997, Heineken, though Ryasun, owns 57%, having bought the Figure 336: Champion shareholders shares from the Sona group in 2011. The company serves the Akwa Ibom Other Akwa Ibom Invest 12% State near the Cameroonian border. Its leading brand is Champion Lager beer 9%
(which looks like Carling Black Label in South Africa). It has a technical Raysun Nigeria (Heineken) 57% services agreement with Nigerian Breweries. Union Trustees Ltd A/c JKNL 9%
Asset Management Nominee A/c 13%
Source: Deutsche Bank, company reports
Figure 337: EBITDA in local currency Figure 338: EBITDA in US$
200 10% 1.5 10% 1.0 100 5% 5% 0.5 0 0% 0%
0.0
EBITDA EBITDA margin EBITDA EBITDA margin -100 -5% -5% -0.5
-200 -10% -1.0 -10%
-1.5 -300 -15% -15%
-2.0 EBITDA (USDm) EBITDA
EBITDA (NGNm) EBITDA -400 -20% -20% -2.5 -500 -25% -25% -3.0
-600 -30% -3.5 -30% 2011 2012 2013 2011 2012 2013
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 339: Price and volume in local currency Figure 340: LTM P/E multiple
25 3000000 120
2500000 20 100
2000000 15 80 1500000 60 10 1000000 40 5 500000
20 0 0
0
Volume mn (RH Axis) Share price (NGN)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 341: Share performance in US$ 12 m 6m 3m 1m Champion Breweries -63.6% -50.0% -20.0% -20.0% Source: Deutsche Bank, Datastream
Page 170 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
This page intentionally left blank
Deutsche Securities (Pty) Ltd Page 171
4 February 2015
Beverage Beer
Castel listed subsidiaries
Castel linked SA Brasseries du Cameroun (BRCP.PA)
Brasseries Quest Afrique (BROA.PA)
Societe Frigorifique & Brasserie de Tunis (SFBT.TN)
Societe Nouvelle des Brasseries du Maroc (SBM.CS)
Figure 342: Valuations key figures of Castel subsidiaries
BRCP.PA BROA.PA SBM.CS SFBT.TN
Market Cap (Local) 511 51 5,848 2,192 Market Cap US$ 605 60 633 1,159 Free Float (%) EV (US$) 627 1,167 Absolute return (US$) 1 month -19.18% -4.32% -4.13% 1.95% Absolute return (US$) 3 month -26.54% -15.96% -5.21% 32.86% Absolute return (US$) 12 month -39.80% -24.14% -10.35% 67.83% P/E LTM 24.87 19.42 P/E NTM 21.25 16.30 EV/EBITDA NTM 11.46 11.02 EV/EBITDA LTM 12.15 6.87 Dividend Yield 0.00 4.98 Net Debt/EBITDA -0.23 -0.29 EBITDA Margin (%) 24.09 23.58 EBIT Margin (%) 17.58 18.51 EV/HL Sales growth (%) -3.17 9.13 EPS growth (%) -13.53 11.61 EBITDA Margin (%) Estimate 21.74 25.17 EBIT Margin (%) Estimate 15.49 18.65 Payout ratio (%) 0.00 46.40 ROE (%) 18.42 21.01 Capex/sales (%) 6.72 11.86 Capex/depreciation (x) 1.03 2.34 Source: Deutsche Bank, Datastream, All estimates from Reuters, Bloomberg Finance LP,
Page 172 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Dec 2011 2012 2013 2014E
Running the Numbers Financial Summary Africa DB EPS (M AD) Reported EPS (M AD) 124 117 101 100 Morocco DPS (M AD) 110 0 0 Beverage BVPS (M AD) 495.1 502 484 Weighted average shares (m) 3 3 3 3 Average market cap (M ADm) 5,924 6,300 6,243 6,300 Societe Nouvelle des Brassaries du Maroc Enterprise value (M ADm) 5,739 6,191 6,190 6,304
Reuters: SBM.CS Bloomberg: SBM.MC Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 13.7 14.2 21.8 22.6 P/BV (x) 3.4 3.3 4.6 Price (12 Dec 14) MAD 2070.00 FCF Yield (%) 4.0 4.4 3.6 Dividend Yield (%) 6.5 EV/Sales (x) 2.4 2.6 2.7 2.9 52-w eek Range MAD 1960.00 – 2381.00 EV/EBITDA (x) 8.8 9.9 11.1 13.1 Market Cap MAD 5,848m EV/EBIT (x) 11.6 12.9 15.2 18.4 US$ 633m Income Statement (MADm) Gross revenue C o mpany P ro file Excise duties as a % of Gross revenue Family group Castel owns 66% of Brasseries du Net revenue 2,346 2,394 2,318 2,208 M aroc in M orocco, with a market share of c97%. EBITDA 652 628 558 480 Leading brands are Flag, Heineken (which has a 2% Depreciation & Amortisation 156 150 151 138 share) and Casablanca. The company also produces and distributes bottled water and distributes the EBIT 496 478 408 342 Castel portfolio of wines. It is highly dependent on Net interest income(expense) 0 0 0 the timing of Ramadan for its sales (which should Associates/affiliates 0 0 0 work favorably until 2017) and the strength of Exceptionals/extraordinaries 0 0 0 European tourism. Other pre-tax income/(expense) 20 9 -12 Profit before tax 516 488 395 Income tax expense -158 -155 -124 M inorities -8 -2 -3 3yr Price Performance Other post-tax income/(expense) 0 0 0 Net profit 351 331 269 232 14000 3000 12000 2500 DB adjustments (including dilution) 10000 2000 8000 1500 DB Net profit 6000 4000 1000 2000 500 Cash Flow (MADm) 0 0 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 306 325 378
CSE SBM .M C (RHS) Net Capex 114 119 156 Free cash flow 192 206 222 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -283 -311 -319 Net inc/(dec) in borrowings 0 0 -7 30 25 Other investing/financing cash flows 14 6 35 20 Net cash flow -76 -99 -69 15 Change in working capital -167 -140 -9 10 5 0 Balance Sheet (MADm) 2011 2012 2013 2014E Cash and other liquid assets 316 223 159 EBITDA M argin EBIT M argin Tangible fixed assets 757 749 752 Goodwill/intangible assets 212 255 240 Growth & Profitability Associates/investments 0 0 0
40 30 Other assets 943 970 1,027 35 30 25 Total assets 2,228 2,197 2,178 25 20 20 Interest bearing debt 40 38 28 15 15 10 Other liabilities 711 677 716 5 10 0 5 Total liabilities 751 715 744 -5 -10 0 Shareholders' equity 1,386 1,406 1,355 2011 2012 2013 2014E M inorities 90 76 78 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 1,477 1,482 1,434 Net debt -276 -185 -131 Solvency Key Company Metrics 0 Sales growth (%) 35.8 2.0 -3.2 -4.7 -5 EPS growth (%) 10.2 -5.7 -13.5 -1.5 -10 EBITDA M argin (%) 27.8 26.2 24.1 21.7 -15 EBIT M argin (%) 21.1 20.0 17.6 15.5 -20 2011 2012 2013 Payout ratio (%) 88.6 0.0 0.0 Return on Average Equity (%) 25.1 22.3 18.4 Net debt/equity (LHS) Return on Average Assets (%) 17.2 14.9 12.3 Capex/sales (%) 4.9 5.0 6.7 Net debt/equity (%) -18.7 -12.5 -9.1 Net interest cover (x)
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 173
4 February 2015
Beverage Beer
SN des Brasseries du Maroc Family group Castel owns 66% of Brasseries du Maroc in Morocco, with a Figure 343: SNBM shareholders market share of c97%. Leading brands are Flag, Heineken (which has a 2% Other Wasatch Advisors 5% Inc share) and Casablanca. The company also produces and distributes bottled 3% water and distributes the Castel portfolio of wines. It is highly dependent on Financiere First 9% the timing of Ramadan for its sales (which should work favorably until 2017) MDI 67% and the strength of European tourism.
CIMR 16%
Source: Deutsche Bank, company reports
Figure 344: EBITDA in local currency Figure 345: EBITDA in US$
660 29% 78.0 29%
640 28% 76.0 28%
620
27% 74.0 27%
EBITDA EBITDA margin EBITDA EBITDA margin 600 26% 72.0 26% 580 25% 70.0 25% 560
24% 68.0 24% EBITDA (USDm) EBITDA
EBITDA (MADm) EBITDA 540
520 23% 66.0 23%
500 22% 64.0 22% 2011 2012 2013 2011 2012 2013
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 346: Price and volume in local currency Figure 347: LTM P/E multiple
2600 120000 26 2400 100000 24 2200 22 80000 2000 20 1800 60000 18 1600 40000 16 1400 20000 1200 14
1000 0 12
10
Volume mn (RH Axis) Share price (MAD)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 348: Share performance in US$ 12 m 6m 3m 1m Brasseries Du Maroc -3.6% -3.4% -2.9% -2.8% Source: Deutsche Bank, Datastream
Page 174 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 31-Dec 2011 2012 2013 2014E
Running the Numbers Financial Summary Africa DB EPS (TND) Reported EPS (TND) 1 1 1 1 Tunisia DPS (TND) 0.44 0.55 0.58 0.65 Beverage BVPS (TND) 5.0 5.6 6.2 6.2 Weighted average shares (m) 90 90 90 90 Average market cap (TNDm) 858 965 1,061 1,939 Societe Frigorifique & Brasserie de Tunis SA Enterprise value (TNDm) 887 970 1,054 1,952
Reuters: SFBT.TN Bloomberg: SFBT TU Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 9.4 10.0 9.3 16.9 P/BV (x) 1.6 2.0 1.9 3.5 Price (12 Dec 14) TND 24.35 FCF Yield (%) 7.5 7.1 6.4 Dividend Yield (%) 5.7 4.9 5.0 3.0 EV/Sales (x) 1.4 1.3 1.3 2.2 52-w eek Range TND 12.25 – 24.38 EV/EBITDA (x) 6.3 5.7 5.4 8.9 Market Cap TND 2,192m EV/EBIT (x) 8.5 7.2 6.8 12.0 US$ 1,159m Income Statement (TNDm) Gross revenue C o mpany P ro file Excise duties as a % of Gross revenue Societe Frigorifique de Tunis is the leading brewer in Net revenue 640 763 833 874 Tunisia and 49%owned by the family group Castel. Its EBITDA 140 171 196 220 brand portfolio includes Celtia, 33 Export, and it Depreciation & Amortisation 35 37 42 57 produces Becks and Lowenbrau under license from ABInBev. The company had a monopoly in the beer EBIT 105 134 154 163 market until Heineken entered in 2007. It also is a Net interest income(expense) -2 -2 -2 Coca Cola bottler. Associates/affiliates 0 0 0 Exceptionals/extraordinaries -1 -1 0 Other pre-tax income/(expense) -2 2 0 Profit before tax 100 133 152 158 Income tax expense -21 -25 -33 M inorities -5 -8 -8 3yr Price Performance Other post-tax income/(expense) 0 0 0 Net profit 74 101 112 115 6000 25 5000 20 DB adjustments (including dilution) 4000 15 3000 DB Net profit 10 2000 5 1000 Cash Flow (TNDm) 0 0 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 124 163 166
TUSISE SFBT.TN (RHS) Net Capex 72 91 99 94 Free cash flow 52 72 67 Equity raised/(bought back) 0 0 6 M argin Trends Dividends paid -39 -42 -52 Net inc/(dec) in borrowings -12 -13 -12 30 25 Other investing/financing cash flows 0 0 0 20 Net cash flow -4 6 4 15 Change in working capital 2 10 -13 10 5 0 Balance Sheet (TNDm) 2011 2012 2013 2014E Cash and other liquid assets 101 105 119 EBITDA M argin EBIT M argin Tangible fixed assets 309 349 383 Goodwill/intangible assets 14 13 14 Growth & Profitability Associates/investments 1 1 1
25 25 Other assets 300 311 351 20 20 Total assets 726 779 868 15 15 Interest bearing debt 83 60 61 10 10 Other liabilities 196 213 245 5 5 Total liabilities 279 273 306 0 0 Shareholders' equity 399 456 511 2011 2012 2013 2014E M inorities 48 49 51 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 447 506 562 559 Net debt -18 -45 -58 -101 Solvency Key Company Metrics 0 0 Sales growth (%) 15.4 19.2 9.1 4.9 -5 -20 -40 EPS growth (%) 3.8 36.6 11.6 2.1 -10 -60 EBITDA M argin (%) 21.9 22.5 23.6 25.2 -15 -80 EBIT M argin (%) 16.4 17.6 18.5 18.6 -20 -100 2011 2012 2013 2014E Payout ratio (%) 53.7 49.1 46.4 50.9 Return on Average Equity (%) 17.2 21.1 21.0 20.5 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 10.5 13.4 13.6 Capex/sales (%) 11.3 12.0 11.9 10.7 Net debt/equity (%) -4.1 -8.8 -10.3 -18.1 Net interest cover (x) -44.9 -59.9 -77.6
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 175
4 February 2015
Beverage Beer
SFB de Tunis Societe Frigorifique de Tunis is the leading brewer in Tunisia and 49% owned Figure 349: SFBT shareholders by the family group Castel. Its brand portfolio includes Celtia, 33 Export, and it Brasseries & Glacieres produces Becks and Lowenbrau under license from ABInBev. The company 26% had a monopoly in the beer market until Heineken entered in 2007. It also is a
Coca Cola bottler. Other 48%
BNA Participations 10%
Star Maghreb 6% Investissement 10%
Source: Deutsche Bank, company reports
Figure 350: EBITDA in local currency Figure 351: EBITDA in US$
250 24% 140.0 24%
120.0 24% 24% 200
100.0 EBITDA EBITDA margin 23% 23% EBITDA margin 150 80.0 23% 23% 60.0 100 22% 22%
40.0
EBITDA (TNDm) EBITDA EBITDA (USDm) EBITDA 50 22% 22% 20.0
0 21% 0.0 21% 2011 2012 2013 2011 2012 2013
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 352: Price and volume in local currency Figure 353: LTM P/E multiple
25.0 450000 18 400000 16 20.0 350000 14 300000 15.0 12 250000 10 200000 10.0 8 150000 6 5.0 100000 50000 4
0.0 0 2
0
Volume mn (RH Axis) Share price (TND)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 354: Share performance in US$ 12 m 6m 3m 1m SFB De Tunis 60.8% 34.3% 27.9% 3.0% Source: Deutsche Bank, Datastream
Page 176 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
This page intentionally left blank
Deutsche Securities (Pty) Ltd Page 177
4 February 2015
Beverage Beer
Independent African listed brewers
Independent Phoenix Breweries (PBL.MZ))
Namibia Breweries (NBS.NM)
Figure 355: Valuations key figures of independent African listed brewers
NBS.NM PBL.NZ
Market Cap (Local) 3,823 4,190 Market Cap US$ 333 130 Free Float (%) 100% 100% EV (US$) 338 130 Absolute return (US$) 1 month -1.23% 6.90% Absolute return (US$) 3 month 9.59% 7.22% Absolute return (US$) 12 month 3.23% 14.47% P/E LTM 11.83 38.72 P/E NTM 11.63 5.67 EV/EBITDA NTM NA 6.36 EV/EBITDA LTM 6.09 9.00 Dividend Yield 0.04 4.34 Net Debt/EBITDA 0.10 NA EBITDA Margin (%) 24.30 NA EBIT Margin (%) 19.48 NA EV/HL Sales growth (%) -2.77 NA EPS growth (%) -6.54 583.19 EBITDA Margin (%) Estimate NA 16.51 EBIT Margin (%) Estimate 19.12 10.52 Payout ratio (%) 65.00 21.09 ROE (%) 22.87 NA Capex/sales (%) 7.95 NA Capex/depreciation (x) 1.65 NA Source: Deutsche Bank, Datastream, All estimates from Reuters and Bloomberg Finance LP
Page 178 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 30-Jun 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (NAD) Reported EPS (NAD) 1 1 1 1 Namibia DPS (NAD) 0.54 0.62 0.65 0.68 Beverage BVPS (NAD) 4.4 4.2 4.5 Weighted average shares (m) 207 207 207 207 Average market cap (NADm) 2,511 2,894 3,373 3,723 Namibia Breweries Enterprise value (NADm) 2,690 2,901 3,431 3,431 Reuters: NBS.NM Bloomberg: NBS.NW Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 10 11 15 12 P/BV (x) 2.4 2.8 3.3 Price (12 Dec 14) NAD 1851.00 FCF Yield (%) 0.0 0.2 0.1 Dividend Yield (%) 0.1 0.1 0.0 EV/Sales (x) 1.2 1.2 1.5 1.4 52-w eek Range NAD 1622.00 – 1851.00 EV/EBITDA (x) 5.3 4.9 6.1 Market Cap NAD 3,823m EV/EBIT (x) 6.4 5.8 7.6 7.1 US$ 333m Income Statement (NADm)
C o mpany P ro file
Founded in 1920, Namibia Breweries is an Net revenue 2,160 2,383 2,317 2,516 independent company with c. 80% share of the EBITDA 505 596 563 Namibian market. The company secured its national Depreciation & Amortisation 82 98 112 market share in Nambia by influencing the government to ban empty glass exports. However, EBIT 423 498 451 481 SABM iller opened a new brewery in Okahandja, Net interest income(expense) -23 -24 -15 posing a threat to its dominant position. Together Associates/affiliates 0 0 0 with its partners Heineken and Diageo, the Exceptionals/extraordinaries 0 0 0 Brandhouse joint venture in South Africa holds c. Other pre-tax income/(expense) -64 -275 -108 10% of the beer market and c.50% of the premium Profit before tax 336 200 328 beer market. Its leading brands are Tafel Lager,Windhoek Lager, and Windhoek Light. Income tax expense -114 -127 -123 M inorities 0 0 0 3yr Price Performance Other post-tax income/(expense) 0 0 0 Net profit 222 73 205 301 55000 1900 50000 1800 1700 DB adjustments (including dilution) 45000 1600 40000 1500 DB Net profit 35000 1400 30000 1300 1200 25000 1100 Cash Flow (NADm) 20000 1000 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 277 610 398
J SE NBS.NW (RHS) Net Capex 179 140 184 Free cash flow 102 473 213 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -106 -120 -134 Net inc/(dec) in borrowings 81 6 -204 30 25 Other investing/financing cash flows -76 -183 -87 20 Net cash flow 0 176 -212 15 Change in working capital -142 110 0 10 5 0 Balance Sheet (NADm) 2012 2013 2014 2015E Cash and other liquid assets 92 268 56 EBITDA M argin EBIT M argin Tangible fixed assets 800 828 875 Goodwill/intangible assets 6 12 11 Growth & Profitability Associates/investments 118 14 0
25 30 Other assets 657 593 599 20 25 Total assets 1,673 1,714 1,541 15 20 Interest bearing debt 270 275 115 10 15 5 10 Other liabilities 495 578 495 0 5 Total liabilities 765 854 610 -5 0 Shareholders' equity 907 861 932 2012 2013 2014 2015E M inorities 0 0 0 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 907 861 932 Net debt 178 8 59 Solvency Key Company Metrics 25 0 20 -5 Sales growth (%) 20.2 10.3 -2.8 8.6 -10 15 -15 EPS growth (%) 2.9 0.9 -6.5 46.0 10 -20 EBITDA M argin (%) 23.4 25.0 24.3 -25 5 -30 EBIT M argin (%) 19.6 20.9 19.5 19.1 0 -35 2012 2013 2014 Payout ratio (%) 50.9 57.9 65.0 46.6 Return on Average Equity (%) 26.1 8.2 22.9 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 14.4 4.3 12.6 Capex/sales (%) 8.3 5.9 8.0 Net debt/equity (%) 19.7 0.9 6.3 Net interest cover (x) -18.2 -21.1 -30.3
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 179
4 February 2015
Beverage Beer
Namibia Breweries Founded in 1920, Namibia Breweries is an independent company with c. 80% Figure 356: Namibia BL shareholders share of the Namibian market. The company secured its national market share in Nambia by influencing the government to ban empty glass exports. NBL Investments However, SABMiller opened a new brewery in Okahandja, posing a threat to holding limited its dominant position. Together with its partners Heineken and Diageo, the 53% Others Brandhouse joint venture in South Africa holds c. 10% of the beer market and 47% c.50% of the premium beer market. Its leading brands are Tafel Lager, Windhoek Lager, and Windhoek Light.
Source: Deutsche Bank, company reports
Figure 357: EBITDA in local currency Figure 358: EBITDA in US$
620 26% 64 26%
600 62 25% 25% 580
60 EBITDA EBITDA margin 560 25% EBITDA margin 25% 58 540 24% 56 24% 520 54
500 24% 24% EBITDA (NADm) EBITDA EBITDA (USDm) EBITDA 52 480 23% 23% 460 50
440 23% 48 23% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 359: Price and volume in local currency Figure 360: LTM P/E multiple
1900 800000 50 1800 700000 45 1700 600000 40 1600 35 500000 1500 30 400000 1400 25 300000 1300 20 200000 1200 15 100000 1100 10 1000 0 5
0
Volume mn (RH Axis) Share price (NAD)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 361: Share performance in US$ 12 m 6m 3m 1m Namibia Breweries -1.9% 1.3% 3.4% 0.7% Source: Deutsche Bank, Datastream
Page 180 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Fiscal year end 30-Jun 2012 2013 2014 2015E
Running the Numbers Financial Summary Africa DB EPS (M UR) Reported EPS (M UR) 12 6 40 17 Mauritius DPS (M UR) 7.5 8 8.4 9.24 Beverage BVPS (M UR) 138.0 165.1 183.2 193.0 Weighted average shares (m) 16 16 16 18 Average market cap (M URm) 3,372 3,331 3,207 4,084 Phoenix Breweries Enterprise value (M URm) 3,342 3,283 3,207 3,714 Reuters: PBL.MZ Bloomberg: PBL MP Valuation Metrics P/E (DB) (x) NC P/E (Reported) (x) 17.1 35.0 4.9 13.1 P/BV (x) 1.45 1.24 1.06 1.17 Price (12 Dec 14) MUR 254.75 FCF Yield (%) 2.3 5.0 16.7 Dividend Yield (%) 3.7 3.9 4.3 4.1 EV/Sales (x) 1.1 1.1 52-w eek Range MUR 187.0 – 254.75 EV/EBITDA (x) 6.5 7.3 9.0 6.4 Market Cap MUR 4,190m EV/EBIT (x) 10.6 11.5 9.0 10.0 US$ 130m Income Statement (MURm) Gross revenue 4,228 4,501 4,820 C o mpany P ro file Excise duties as a % of Gross revenue 28.6% 30.7% An independent company listed in 1993, Phoenix Net revenue 3,019 3,119 Beverages is M auritius’ leading beverage company EBITDA 512 448 356 584 with leading brands Phoenix Lager and Blue M arlin. It Depreciation & Amortisation 197 164 0 212 also licenses the Diageo portfolio, including Guinness FES and M alta and has a wine and EBIT 314 285 356 372 distribution business. Additionally, the company is Net interest income(expense) -26 -27 -21 the sole bottler of Coca Cola, a relationship under its Associates/affiliates -50 -130 0 predecessor since 1931. Exceptionals/extraordinaries 0 0 377 Other pre-tax income/(expense) 0 0 0 Profit before tax 239 128 712 367 Income tax expense -48 -32 -58 M inorities 0 0 -1 3yr Price Performance Other post-tax income/(expense) 1 0 -74 Net profit 192 96 579 312 2200 230 2100 220 2000 210 DB adjustments (including dilution) 200 1900 190 DB Net profit 1800 180 1700 170 1600 160 Cash Flow (MURm) 1500 150 Dec-11 Dec-12 Dec-13 Dec-14 Cash flow from operations 293 377 533
SEM PBL.M Z (RHS) Net Capex -218 -208 -251 Free cash flow 74 169 533 Equity raised/(bought back) 0 0 0 M argin Trends Dividends paid -123 -132 0 Net inc/(dec) in borrowings 37 -58 0 18 16 Other investing/financing cash flows -209 -212 -34 14 12 Net cash flow -3 -25 499 10 8 Change in working capital 293 377 533 6 4 2 0 Balance Sheet (MURm) 2012 2013 2014 Cash and other liquid assets 79 70 EBITDA M argin EBIT M argin Tangible fixed assets 2,057 2,687 2,662 Goodwill/intangible assets 10 8 Growth & Profitability Associates/investments 8 7
7 10 Other assets 1,095 1,045 1,325 6 8 Total assets 3,250 3,817 3,987 5 4 6 Interest bearing debt 48 22 3 4 Other liabilities 1,070 1,080 974 2 2 1 Total liabilities 1,118 1,102 974 0 0 Shareholders' equity 2,269 2,714 3,014 2012 2013 2014 M inorities 1 1 Sales growth (LHS) Return on Av erage Equity (RHS) Total shareholders' equity 2,270 2,715 3,014 3,491 Net debt -31 -48 -298 Solvency Key Company Metrics 0 0 Sales growth (%) 6.3 3.3 -2 -5 -4 EPS growth (%) 16.6 -50.0 583.2 -56.7 -10 -6 EBITDA M argin (%) 17.0 14.4 16.5 -15 -8 EBIT M argin (%) 10.4 9.1 10.5 -10 -20 2012 2013 2014 2015E Payout ratio (%) 64.3 137.2 21.1 53.6 Return on Average Equity (%) 8.6 3.8 Net debt/equity (LHS) Net interes t c ov er (RHS) Return on Average Assets (%) 6.0 2.7 Capex/sales (%) 0.0 0.0 Net debt/equity (%) -1.4 -1.8 -8.5 Net interest cover (x) -12.2 -10.6 -16.8
Source: Company data, Datastream, Reuters, Bloomberg
Deutsche Securities (Pty) Ltd Page 181
4 February 2015
Beverage Beer
Phoenix Breweries An independent company listed in 1993, Phoenix Beverages is Mauritius’ Figure 362: Phoenix shareholders leading beverage company with leading brands Phoenix Lager and Blue Marlin. Phoenix Investment Company Limited It also licenses the Diageo portfolio, including Guinness FES and Malta and has 31% a wine and distribution business. Additionally, the company is the sole bottler Other of Coca Cola, a relationship under its predecessor since 1931 43%
National Pensions Fund 3% Camp Investment State St Bank and Company Limited Trust Co A/c The 17% Africa Emerging 6% Source: Deutsche Bank, company reports
Figure 363: EBITDA in local currency Figure 364: EBITDA in US$
600 18% 20.00 18%
17% 18.00 17% 500 17% 16.00 17%
14.00 EBITDA EBITDA margin 400 16% EBITDA margin 16% 12.00 16% 16% 300 10.00 15% 15% 8.00 200 15% 15%
6.00
EBITDA (USDm) EBITDA EBITDA (MURm) EBITDA 14% 4.00 14% 100 14% 2.00 14%
0 13% 0.00 13% 2012 2013 2014 2012 2013 2014
Source: Deutsche Bank, company reports Source: Deutsche Bank
Figure 365: Price and volume in local currency Figure 366: LTM P/E multiple
230 250000 20 18 220 200000 16 210 14 150000 200 12
190 10 100000 8 180 50000 6 170 4
160 0 2
0
Volume mn (RH Axis) Share price (MUR)
Source: Deutsche Bank, datastream Source: Deutsche Bank, datastream
Figure 367: Share performance in US$ 12 m 6m 3m 1m Phoenix Beverages 16.8% 14.2% 5.1% 5.8% Source: Deutsche Bank, Datastream
Page 182 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
This page intentionally left blank
Deutsche Securities (Pty) Ltd Page 183
4 February 2015
Beverage Beer
Addendum
Getting a Harvard MBA in Africa
The greatest training ground Heineken’s CEO, Jean-Francois van Boxmeer, has often been quoted as “The years when I worked in believing that his tenure in Africa was worth a Harvard MBA threefold. We Africa, I often say it’s my would, perhaps somewhat predictably, agree wholeheartedly. Harvard business school… As a manager and businessman, I learnt a lot and what you Notably, van Boxmeer has stood by his word. Any talented manager in the learn is to act quickly and not Heineken group, particularly at the board -1 level, seems to have spent some always relying on a lot of time on the continent, including the General Manager leading the US business readily information and take (previously Commercial Director in the DRC at a time when they took market risks. There are always calculated risks- but you have leadership from Castel), the General Manager leading the Mexican business to take the risks and stand for (previously GM Burundi), and the Director of Innovation (previously GM the consequence. Republic of Congo). In the later case, if innovation requires an entrepreneurial spirit, no place is better than Africa to gain those skills. What I learnt of Africa and the enormous power of its people is that when they put We would also argue that for beer companies in particular, Africa presents one their belief, effort and passion of its greatest talent pools. In African markets such as Tanzania and Nigeria, behind something it can one can find good talent at every level that wants to work for a beer company. happen- that is often not The conundrum that beer companies face in developed markets in Europe and understood in other parts of the world. I learnt that you North America is the lack of managerial talent that aspires to a career in beer. have an enormous force Often the best and brightest graduates seek opportunities in technology and when it is mobilised even in the latest Silicon Valley venture, or even consulting and finance. If the adversity. It was a fantastic traditional corporate ladder is chosen, the consumer goods industry is not very experience and it changed my life.” high up on the list.
Thus, the often-controversial alcohol industry can have particular difficulty attracting talent. If candidates do opt for careers in this industry, beer CEO Heineken companies compete with the premium lifestyle promised by the spirits May 2014 companies. Within beer, probably only Heineken has the caché for a young graduate as a cool brand that transcends borders. What has not helped the beer companies are their relatively unglamorous locations. It is not surprising that ABInBev has recently taken a more pragmatic approach, moving its global and US commercial headquarters to New York. Still, this might not be enough to prompt the next class of Ivy MBA grads to forsake other options.
Contrast this to Africa. Although the talent pool may be smaller, those with talent – often with educational stints abroad – are attracted to careers in the beer industry. In most markets, the subsidiaries of SABMiller, Heineken, Diageo, and Castel are seen as the most attractive employers and as those that provide the greatest opportunity for advancement. The challenge is to harness the talent, develop it, and give it the opportunities to thrive.
In the late 1970’s, SABMiller pioneered management programs for its local employees – a controversial policy at the time. Some rose high in the ranks of management, and the development of that talent continues to this day. This effort has borne fruit, as many of those who have been given the opportunity in the past are today leading figures in JSE 40 companies. As an example, it is perhaps remarkable how many former Castle Lager Assistant Brand Managers today are Marketing Directors, CMO’s and CEO’s in leading South African
Page 184 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
companies. The SABMiller Africa division also runs the African Talent program – a careful and nurtured focus on the top 100 managers in African businesses. Talented managers from Africa are rotated throughout the division, with an occasional assignment to the regional or global headquarters.
Heineken has taken it a step further by not limiting the geographical footprint/division of its talent. Its international graduate trainee programme is truly international, taking in a flight of young graduates from Africa every year. They spend 18 months in three different markets learning local operations before being formally deployed to their first assignment. The company also takes talent from Africa into its broader global operations. We have seen managers from Africa operate in Latin America and Europe, often bringing a wealth of experience back home, ready to take on international competition, as is the case in Nigeria.
Africa gives more than it takes – one would think more than just the ubiquitous Harvard MBA perhaps.
Deutsche Securities (Pty) Ltd Page 185
4 February 2015
Beverage Beer
The authors of this report wish to acknowledge the contribution made by Archit Agarwal, Shwetha Ramachandran and Meera Mohan, employees of CRISIL Global Research & Analytics, a division of CRISIL Limited, a third-party provider of offshore research support services to Deutsche Bank.
Page 186 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure Heineken HEIN.AS 66.15 (EUR) 3 Feb 15 14,15 Diageo DGE.L 1,931.21 (GBp) 3 Feb 15 7,14,15,17 SABMiller SABJ.J 620.78 () 3 Feb 15 4,7,14,15,SD11 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Data is sourced from Deutsche Bank and subject companies. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.
4. The research analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest in the securities, or derivatives thereof, issued by this company or sovereign. Please contact us if you are interested in further information.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.
15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.
Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.
4. The research analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest in the securities, or derivatives thereof, issued by this company or sovereign. Please contact us if you are interested in further information.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, Convertible Bonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s) group, is more than 25m Euros.
Special Disclosures 11. A family member of the analyst is an employee of SAB Miller.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Deutsche Securities (Pty) Ltd Page 187
4 February 2015 Beverage Beer
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Wynand Van Zyl
Historical recommendations and target price: Heineken (HEIN.AS) (as of 2/3/2015)
80.00 Previous Recommendations
Strong Buy 70.00 Buy 10 Market Perform 60.00 8 Underperform 5 6 9 4 Not Rated 7 50.00 3 Suspended Rating 2 Current Recommendations 40.00 1 Buy Hold SecurityPrice 30.00 Sell Not Rated 20.00 Suspended Rating
*New Recommendation Structure 10.00 as of September 9,2002
0.00 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Date
1. 15/02/2012: Hold, Target Price Change EUR40.00 6. 13/02/2013: Buy, Target Price Change EUR60.00 2. 26/07/2012: Hold, Target Price Change EUR44.00 7. 25/03/2014: Downgrade to Hold, Target Price Change EUR50.00 3. 23/09/2012: Upgrade to Buy, Target Price Change EUR52.00 8. 29/07/2014: Upgrade to Buy, Target Price Change EUR60.00 4. 23/11/2012: Buy, Target Price Change EUR53.00 9. 20/08/2014: Buy, Target Price Change EUR65.00 5. 04/01/2013: Buy, Target Price Change EUR55.00 10. 12/01/2015: Buy, Target Price Change EUR70.00
Page 188 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Historical recommendations and target price: Diageo (DGE.L) (as of 2/3/2015)
2,500.00 Previous Recommendations
Strong Buy 4 7 Buy 2,000.00 3 5 6 Market Perform 2 Underperform 1 Not Rated Suspended Rating 1,500.00 Current Recommendations
Buy 1,000.00 Hold SecurityPrice Sell Not Rated Suspended Rating 500.00 *New Recommendation Structure as of September 9,2002
0.00 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Date
1. 03/05/2012: Buy, Target Price Change GBP1,750.00 5. 25/03/2014: Buy, Target Price Change GBP2,050.00 2. 30/07/2012: Buy, Target Price Change GBP1,900.00 6. 16/12/2014: Buy, Target Price Change GBP2,000.00 3. 09/11/2012: Buy, Target Price Change GBP2,000.00 7. 29/01/2015: Buy, Target Price Change GBP2,150.00 4. 31/07/2013: Buy, Target Price Change GBP2,200.00
Historical recommendations and target price: SABMiller (SABJ.J) (as of 2/3/2015)
800.00 Previous Recommendations
Strong Buy 700.00 Buy 8 Market Perform 600.00 Underperform 7 6 Not Rated 500.00 Suspended Rating 5 Current Recommendations 3 4 400.00 2 1 Buy Hold SecurityPrice 300.00 Sell Not Rated 200.00 Suspended Rating
*New Recommendation Structure 100.00 as of September 9,2002
0.00 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Date
1. 19/04/2012: Hold, Target Price Change ZAR315.00 5. 22/01/2013: Hold, Target Price Change ZAR400.00 2. 26/07/2012: Hold, Target Price Change ZAR330.00 6. 03/04/2013: Hold, Target Price Change ZAR470.00 3. 18/10/2012: Hold, Target Price Change ZAR350.00 7. 21/11/2013: Hold, Target Price Change ZAR500.00 4. 22/11/2012: Hold, Target Price Change ZAR380.00 8. 30/07/2014: Hold, Target Price Change ZAR630.00
Deutsche Securities (Pty) Ltd Page 189
4 February 2015 Beverage Beer
Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 40 share-holder return (TSR = percentage change in 35 54 % share price from current price to projected target price 30 45 % plus pro-jected dividend yield ) , we recommend that 25 investors buy the stock. 20 Sell: Based on a current 12-month view of total share- 15 38 % 20 % holder return, we recommend that investors sell the 10 5 2 % 0 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: GEMs South African Universe 1. Newly issued research recommendations and
target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
Page 190 Deutsche Securities (Pty) Ltd
4 February 2015 Beverage Beer
Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com. 3. Country-Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of Deutsche Securities Inc. (DSI) are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.
Deutsche Securities (Pty) Ltd Page 191
David Folkerts-Landau Group Chief Economist Member of the Group Executive Committee
Raj Hindocha Marcel Cassard Richard Smith and Steve Pollard Global Chief Operating Officer Global Head Co-Global Heads Research FICC Research & Global Macro Economics Equity Research
Michael Spencer Ralf Hoffmann Andreas Neubauer Steve Pollard Regional Head Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany Americas Research
International locations
Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Große Gallusstraße 10-14 Filiale Hongkong 2-11-1 Nagatacho Level 16 60272 Frankfurt am Main International Commerce Centre, Sanno Park Tower Corner of Hunter & Phillip Streets Germany 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Tel: (49) 69 910 00 Hong Kong Japan Australia Tel: (852) 2203 8888 Tel: (81) 3 5156 6770 Tel: (61) 2 8258 1234 Deutsche Bank AG London Deutsche Bank Securities Inc. 1 Great Winchester Street 60 Wall Street London EC2N 2EQ New York, NY 10005 United Kingdom United States of America Tel: (44) 20 7545 8000 Tel: (1) 212 250 2500
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement. In August 2009, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target price of any stock. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany, this report is approved and/or communicated by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorised under German Banking Law (competent authority: European Central Bank) and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority. In the United Kingdom, this report is approved and/or communicated by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright © 2015 Deutsche Bank AG